Auditing A Risk Based-Approach to Conducting a Quality Audit 10th Edition Johnstone Test Bank

Auditing A Risk Based-Approach to Conducting a Quality Audit 10th Edition Johnstone Test Bank

richard@qwconsultancy.com

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Chapter 1 - Auditing: Integral to the Economy 1. The need for assurance services arises because the interests of the users of information may be different from that of the interests of those responsible for providing information. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Demand for Assurances 2. A financial statement audit is a systematic process of objectively obtaining and evaluating evidence. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 3. Auditors should conduct their work with an attitude of professional skepticism. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 5. An integrated audit requires the auditor to assess the effectiveness of internal controls. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 6. In all states, a CPA must have completed at least 150 hours of college semester hours to receive their license. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 7. The Center for Audit Quality was started by the International Federation of Accountants. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 8. The Center for Audit Quality has the primary authority to set auditing standards. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 9. In an audit, management is considered the “client”. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 10. Auditing is the process of attesting to assertions about economic actions and events.

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Chapter 1 - Auditing: Integral to the Economy a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 11. Auditing is the process of verifying the accuracy of the financial statements. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 12. Management may have incentive to bias financial information, but the various users of the statements are not likely to have conflicting interests in the financial information. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the External Auditing Profession 13. Auditing exists because users need unbiased information on which to assess management performance and make economic decisions. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 14. A free market can only exist if there is sharing of perfectly reliable information. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Demand for Assurances 15. Users rely on the auditors' independent assessment of financial statement presentation because few users have direct knowledge of the company's operations. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Demand for Assurances 16. The PCAOB is a public board, appointed by Congress, to provide oversight of the firms that audit public companies registered with the SEC. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 17. If the auditor has no reservations about management’s financial statements then the auditor will issue a qualified opinion. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 18. Independence is often referred to as the cornerstone of the auditing profession. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Overview of the External Auditing Profession

19. Audits of publicly traded companies must be performed by multinational accounting firms. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-03 - LO: 01-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Audit Service Providers and the Skills and Knowledge Needed by Professionals 20. Auditors generally need quantitative and mathematical skillsets more than they need communication and leadership skills. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-03 - LO: 01-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Audit Service Providers and the Skills and Knowledge Needed by Professionals 21. The overall objective of an audit is to obtain assurance whether the financial statements are free of misstatement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the External Auditing Profession 22. Bondholders are one of the users of financial statements. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Scope of Services 23. A key responsibility of the internal audit function is to provide assurance on the reliability of financial reporting to external stakeholders of a company. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-02 - LO: 01-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Parties Involved in Preparing and Auditing Financial Statements 24. The Public Company Accounting Oversight Board provides the criteria against which the auditor measures the fairness of financial statement presentation. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 25. The FASB is responsible for creating International Financial Reporting Standards. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-04 - LO: 01-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Organizations Affecting the External Auditing Profession 26. External auditors frequently serve on the audit committees of their clients. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy TOPICS:

The Providers of Assurance Services

27. CPA certificates for auditors are issued by state boards of accountancy. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 28. Internal controls are the responsibility of management. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 29. The court system acts as a deterrent to quality controls for the auditing profession. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-04 - LO: 01-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Organizations Affecting the External Auditing Profession 30. The SEC is the governmental body with the oversight responsibility for the efficient operation of capital markets in the United States. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 31. Audit firm culture is one of the primary drivers of audit quality. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-05 - LO: 01-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Quality 32. Effective audit processes, by themselves, are sufficient to achieve audit quality. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-05 - LO: 01-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Quality 33. Only the Big 4 audit firms can conduct audits of private companies in the United States. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 34. The American Institute of CPAs sets auditing standards for non-publicly traded companies. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 35. Though often relying on the FASB, the SEC has authority to establish GAAP for publicly traded companies. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 36. The SEC has authority to establish GAAP for all business enterprises. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 37. The Public Company Accounting Oversight Board was established by the AICPA in response to Securities laws. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 38. The Center for Audit Quality is responsible for the oversight of the peer review process for registered audit firms. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-06 - LO: 01-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Achieving Audit Quality 39. The SEC provides annual reports to the PCAOB. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy 40. The AICPA has a peer review program that reviews and evaluates the portions of an audit firm’s accounting and audit practice that are not inspected by the PCAOB. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-06 - LO: 01-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Achieving Audit Quality and Minimizing Lawsuits 41. A quality audit is one performed “in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles (GAAP) and (2) are not materially misstated whether due to errors or fraud.” a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 42. The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor independence requirements. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 43. The SEC and PCAOB independence rules for auditors are identical.. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-06 - LO: 01-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy TOPICS:

Achieving Audit Quality and Minimizing Lawsuits

44. Audit quality is driven, in part, by the audit firm’s culture. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 45. Audit staff performing audit work must be appropriately supervised by partners and managers. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 46. Which the following is not a reason for a public company to receive an audit? 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.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Demand for Assurances 47. What is the term used to describe a systematic process of objectively obtaining 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? a. Internal audit. b. Financial statement audit. c. External audit. d. Program audit ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Overview of the External Auditing Profession

48. An Integrated Audit Report provides opinion(s) on which of the following? a. The financial statements. b. Internal controls. c. Both financial statements and internal controls. d. Neither financial statements or internal controls.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Scope of Services 49. Which one of the following organizations is recognized for providing guidance on a framework for internal control ? a. AICPA. b. PCAOB. c. IAASB. d. COSO..

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-04 - LO: 01-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Organizations Affecting the External Auditing Profession 50. Which phase of the audit opinion formulation process is most commonly thought of as auditing by the general public? a. Performing risk assessment. b. Obtaining evidence about internal controls. c. Obtaining substantive evidence about accounts. d. Making reporting decisions..

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the External Auditing Profession 51. Which one of the following is not a primary driver of audit quality? a. Skills and personal qualities of audit staff.

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Chapter 1 - Auditing: Integral to the Economy b. Reasonable audit fees. c. Effective audit processes.. d. Audit firm culture.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-05 - LO: 01-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Quality 52. Who are the users of the financial statements? a. Management. b. Auditors. c. Taxing Authorities. d. Both A and C. ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 53. Which one of the following is a factor that creates a need for an 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. Both A and C. e. Both A and B. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the External Auditing Profession 54. What can users of the audit report reasonably expect from the audited financial statements? a. The financial statements are complete and contain many of the important financial disclosures. b. The financial statements are presented fairly according to the substance of GAAP. c. The financial statements are free from all errors. d. All of the above. e. None of the above.

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Chapter 1 - Auditing: Integral to the Economy ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 55. 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 56. According to the FRC which of the following attributes contributes to the reliability and usefulness of audit reporting? a. The audit methodology is well structured. b. Quality technical support is available when auditors require guidance. c. Auditors appropriately conclude as to the truth and fairness of the financial statements. d. The audit work is effectively reviewed.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-05 - LO: 01-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Quality 57. To conduct an audit, what must an auditor do? a. Comply with relevant ethical standards. b. Exercise perfect judgment. c. Obtain sufficient appropriate evidence to provide absolute assurance. d. All of the above.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 58. An “integrated audit” expresses an opinion on which of the following?

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Chapter 1 - Auditing: Integral to the Economy 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. ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 59. What is the first phase in an audit? a. Client acceptance or client continuance. b. Understanding the client. c. Understanding internal controls. d. Testing of account balances.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 60. How is the audit report referred to when the auditor has no reservations about management’s financial statements? a. An unqualified report. b. A qualified report. c. An adverse report. d. An integrated report.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-01 - LO: 01-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the External Auditing Profession 61. Why is auditing important in a free market society? a. The public requires auditors to function as divisions of regulatory bodies. b. Auditors detect all errors and fraud perpetrated by company employees. c. It provides reliable information upon which to judge economic performance. d. The auditor is an amiable insurance policy for investors. e. All of the above are true.

ANSWER: c Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 62. Which of the following procedures do third-party users of the audit report not expect the auditor to perform? a. Evaluate measurements and disclosures made by management. b. Provide a biased evaluation of the financial statements. c. Determine whether financial statements are presented in accordance with GAAP. d. Gather sufficient appropriate evidence to support their opinion.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 63. What must audit firms do to perform financial statement audits for public companies? a. Register with the American Institute of Certified Public Accountants. b. Register with the Institute of Internal Auditors. c. Register with the U.S. General Accounting Office. d. Register with the Public Company Accounting Oversight Board.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 64. What must an auditor do in an audit? a. Consider how the economic activity is portrayed in the financial statements. b. Force management to make operational decisions that will improve the company’s financial performance. c. Disregard independence in order to find the underlying truth of the evidence. d. Establish new criteria by which financial statements may be compared.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 65. What document communicates the conclusions of the financial statement audit? a. The financial statement. b. Written management assertion.

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Chapter 1 - Auditing: Integral to the Economy c. The audit report. d. None of the above.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 66. Which of the following is a driver of audit quality? a. Audit firm culture. b. Engagement team skills and attributes. c. Factors outside control of auditors. d. Investor requirements. e. A, B, and C only.

ANSWER: e POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 67. In the United States,what is the most common criteria against which the auditor measures the fairness of financial statement presentation? a. Auditing standards. b. Generally accepted accounting principles. c. Generally accepted accounting standards. d. Governmental accounting principles.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 68. What is the management of a company is responsible for? a. Hiring the auditor. b. Preparing the financial statements. c. The audit workpapers. d. Ensuring auditor independence.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy TOPICS:

Auditing Defined

69. Which one of the following is not an example of a typical review program? a. Interoffice reviews. b. Engagement quality review. c. Peer reviews. d. Self reviews.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 70. Which term describes the type of threat which occurs when top management threatens to replace the audit firm because of a disagreement over an accounting issue? a. Management participation threat. b. Undue influence threat. c. Adverse interest threat. d. Financial self-interest threat.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-06 - LO: 01-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Achieving Audit Quality and Minimizing Lawsuits 71. Who is responsible for internal controls within an organization? a. The internal auditor. b. The external auditor. c. Management. d. The PCAOB. ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 72. According to the AICPA, which of the following is not a safeguard to the auditing profession? a. Education. b. Professional standards. c. External reviews. d. Legislation concerning competency requirements.

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Chapter 1 - Auditing: Integral to the Economy ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 73. Which of the following groups is not typically considered to be a user of the audited financial statements? a. Management. b. Vendors. c. Retired Employees. d. Competitors.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Users of Assurance Services 74. What is the audit committee of the board of directors of a company responsible for? a. Hiring the auditor. b. Preparing the financial statements. c. The audit workpapers. d. Obtaining evidence.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Changes in Profession 75. Which of the following is typically an attribute of a smaller audit firm? a. The type of work is primarily external audits. b. The firm has multiple teams that work on the audit of a single entitiy and then disband. c. The firm has multiple teams that overlap across engagements. d. The firm has a relatively higher level of staff turnover.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-03 - LO: 01-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Audit Providers and the Skill and Knowledge Needed by Professionals 76. The scope of the work to be done by the auditor on the audit is described in which document?

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Chapter 1 - Auditing: Integral to the Economy a. Contract letter.. b. Management letter.. c. Representation letter. d. Engagement letter..

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-06 - LO: 01-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Achieving Audit Quality and Minimizing Lawsuits 77. Which governing board performs quality reviews on registered audit firms that audit public companies? a. PCAOB. b. GAO. c. AICPA. d. FASB. ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 78. Congress authorized which of the following organizations to establish generally accepted accounting principles? a. SEC. b. APB. c. AICPA. d. FASB. ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 79. Which of the following does the public expect of auditors? a. Understand and enforce principles that best portray the spirit of FASB concepts. b. Be neutral to preparers and users of financial information. c. Recognize that the investing public is the primary user of audit services. d. Take responsibility for the discovery of fraud. e. All of the above are expectations of the public.

ANSWER: e Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Required Reporting on Internal Controls 80. Who licenses CPAs? a. The PCAOB. b. The AICPA. c. The State Boards of Accountancy. d. The SEC. ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 81. According to the Financial Reporting Council (FRC), when is the culture of an audit firm likely to provide a positive contribution to audit quality? a. When the leadership of the audit firm ensures partners and other staff have sufficient time and resources to deal with difficult issues as they arise. b. When the leadership of the audit firm ensures robust systems for client acceptance and continuation based on the likelihood of increased audit fees. c. When the leadership of the audit firm creates an environment where achieving efficiency is valued, invested in and rewarded. d. When the leadership of the audit firm ensures financial considerations drive actions.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-05 - LO: 01-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Quality 82. What is the primary role of the court system for the auditing profession? a. To act as a quality-control mechanism. b. To provide guidance on unclear legislation. c. To punish audit firms that issue the wrong audit report. d. To express opinions on the fairness of accounting principles.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-04 - LO: 01-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy TOPICS:

Organizations Affecting the External Auditing Profession

83. Which organization issued the Internal Control, Integrated Framework which serves as the primary criterion for evaluating the quality of a company’s internal control system? a. PCAOB. b. COSO. c. AICPA. d. GAO. ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 84. Which of the following is not part of the systematic process called auditing? a. Communicating results of the audit to users. b. Procuring and evaluating evidence. c. Providing important managerial decisions for a client. d. Comparing evidence regarding assertions to certain established criteria.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 85. As it relates to an audit, which of following statement about professional skepticism is true? a. Professional skepticism is not taken into consideration. b. Professional skepticism relates only to the nature of procedures performed. c. Professional skepticism is an attitude. d. Professional skepticism is determined based upon the importance to a user of the financial statements.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 86. Which of the following items should an auditor communicate to an audit committee? a. Any meaningful threats to auditor objectivity. b. The scope of the audit. c. The qualitative aspects of the entity’s accounting and reporting and potential ways of improving financial reporting.

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Chapter 1 - Auditing: Integral to the Economy d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-05 - LO: 01-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Quality 87. Which organization is responsible for setting International Standards on Auditing? a. IASB b. IFRS c. IAASB d. AICPA ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-04 - LO: 01-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Organizations Affecting the External Auditing Profession 88. The Center for Audit Quality is dedicated to enhancing investor confidence in what? a. The financial markets. b. Management. c. Auditors. d. Both B and C. e. All of the above.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 89. Which of the following is not a goal of auditor independence? a. To achieve consistent auditor regulation. b. To foster high quality audits. c. To promote investor confidence in the financial statements. d. To minimize the possibility that external factors will influence auditor’s judgements.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.01-06 - LO: 01-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Achieving Audit Quality and Minimizing Lawsuits

90. What is the primary objective of the independent auditor’s report on financial statements? a. To report on all instances of fraud. b. To assist the board in evaluating management’s effectiveness. c. To attest to the credit-worthiness of the client.. d. To give credibility to management’s prepared financial statements.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 91. Attributes of Auditors Discuss the three or more attributes that an auditors possess in order to maintain credibility. Explain the importance of these attributes to the audit.

ANSWER: Subject Matter Knowledge - The assurance provider must be an expert in the 1) 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 2) 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 3) 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 4) draw accurate conclusions based upon the results of testing competent, sufficient evidence obtained.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 92. 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.

ANSWER: Users of audited financial statements may include: • Management may utilize the audit report to determine whether the financial Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy

• • •

•

statements are presented in accordance with GAAP, 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

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 93. Overview of Financial Statement Audit Define auditing and discuss how its components fit into an overview of a financial statement audit.

ANSWER: 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.”

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 94. 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.

PCAOB is the primary governing regulatory body of auditors of public company financial ANSWER:

statements. It was established by the Congress as a result of the Sarbanes-Oxley Act of 2002. It sets auditing standards for audits of public companies, requires registration of audit firms auditing public companies and performs quality reviews of registered firms.

AICPA With the establishment of the PCAOB, the role of the AICPA has diminished.

Membership in the organization is voluntary. The AICPA establishes standards for other attestation services, accounting and review services, consulting and tax services. It

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Chapter 1 - Auditing: Integral to the Economy organizes continuing education programs and administers the Uniform CPA Examination.

State Boards of Accountancy license CPAs and are charged with regulating the profession at the state level.

SEC has been granted authority to establish GAAP for publicly traded companies. Its primary mission is to protect the investing public; it has oversight of the PCAOB. The GAO is responsible for setting forth auditing standards for governmental agencies.

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

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 95. Audit Quality What are three drivers of audit quality according to the Financial Reporting Council (FRC)’s “The Audit Quality Framework”?

ANSWER: There are five primary drivers of audit quality, including (1) audit firm culture, (2) the skills and personal qualities of audit partners and staff, (3) the effectiveness of the audit process, (4) the reliability and usefulness of audit reporting, and (5) factors outside the control of auditors that affect audit quality.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 96. The Need for Audited Financial Statements Why do financial statement users need independent assurance about information provided by management?

ANSWER: The need for independent assurance arises from several factors: * Potential bias —Management has incentives to bias financial information in order to convey a better impression of the financial data than real circumstances might merit. For example, management? ’s compensation may be tied to profitability or stock price, so managers may be tempted to “bend” GAAP to make the organization ’s performance look better. * Remoteness —An organization and the users of its financial information are often remote from each other, both in terms of geographic distance and the extent of information available to the both parties. Most users cannot interview management, tour a company ’s plant, or review its financial records firsthand; instead, they must rely on financial statements to communicate the results of management’s performance. This can tempt management to keep information from users or bend GAAP so the organization looks better. *Complexity —Transactions, information, and processing systems are often very complex, so it can be difficult to determine their proper presentation. This provides an opportunity for management to deceive users. * Consequences —During the past decade, many financial statement users — Cengage Learning Testing, Powered by Cognero

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Chapter 1 - Auditing: Integral to the Economy pension funds, private investors, venture capitalists, and banks —lost billions of dollars because financial information had become unreliable. As an example, the factors leading up to, and the consequences of, unreliable information can be seen in the sub-prime mortgage crisis in the United States.

Many borrowers did not provide correct information on their loan applications and lenders sometimes did not perform adequate due diligence in making lending decisions. Consequently, various financial statement users and others suffered significant losses. When financial information is not reliable, investors and other users lose a significant source of information that they need to make decisions that have important consequences.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Demand for Assurances 97. Regulatory and professional bodies Write the full name of the following regulatory and professional acronyms and describe the function of each entity: PCAOB AICPA SEC IIA FASB ANSWER:

POINTS:

PCAOB is the primary governing regulatory body of auditors of public company financial statements. It was established by the Congress as a result of the Sarbanes-Oxley Act of 2002. It sets auditing standards for audits of public companies, requires registration of audit firms auditing public companies and performs quality reviews of registered firms. The PCAOB is overseen by the SEC. AICPA With the establishment of the PCAOB, the role of the AICPA has diminished.

Membership in the organization is voluntary. The AICPA establishes standards for other attestation services, accounting and review services, consulting and tax services. It organizes continuing education programs and administers the Uniform CPA Examination.

Securities and Exchange Commission Congress established the SEC to regulate the capital market system and establish GAAP for publicly traded companies. The SEC delegated the standard setting authority to the FASB but reviews and suggests standards when necessary. The SEC oversees the responsibilities of the PCAOB. Institute of Internal Auditors The IIA issues standards and interpretations of standards for internal auditing. It also administers the Uniform CIA Examination and the certified internal auditor program to establish the benchmark measure of competence for the internal auditing profession.

Financial Accounting Standards Board The FASB is charged with issuing authoritative accounting pronouncements.

1

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Chapter 1 - Auditing: Integral to the Economy NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 98. 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?

In addition to integrity, ethics and independence, auditors must possess an inherent ability ANSWER:

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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined 99. Impact of Sarbanes-Oxley What are four ways that Sarbanes-Oxley impacted the auditing profession?

ANSWER: • Increased auditor independence • Enhanced the role and importance of the audit committee • Required reporting on internal control over financial reporting • Provided oversight of the external auditing profession by the Public Company Accounting Oversight Board (PCAOB) POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional and Regulatory Organizations 100. Audit Quality What is audit quality?

ANSWER:

A definition published by the GAO (2003) states that a quality audit is one

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Chapter 1 - Auditing: Integral to the Economy performed “in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with generally accepted accounting principles GAAP and (2) are not materially misstated whether due to errors or fraud. ” POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Defined

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance 1. The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 2. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 3. The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the financial statements are free of material fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: User Expectations of Auditor Responsibility 4. Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 5. Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 6. An example of fraudulent financial reporting is the treasurer's diversion of hundreds of thousands of dollars into a personal money market account. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 7. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it were its subsidiary. BruceCo. has probably committed fraud because of its misapplication of consolidation principles. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 8. Consideration of fraud in financial statement audits is a relatively new concept derived originally from the Sarbanes-Oxley Act. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: User Expectations of Auditor Responsibility 9. The most important lesson to be learned from The Great Salad Oil Swindle is that auditors can commit fraud by falsely including inventory that does not exist. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 10. The onslaught of fraud in financial statements over the recent decade has been the first of its kind in history. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: User Expectations of Auditor Responsibility 11. The fraud triangle requires the auditor to actively consider and assess the risk of fraud for clients and their financial statements. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: User Expectations of Auditor Responsibility 12. Fraud detection procedures should only be performed for clients that have had fraud problems in the past. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 13. If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance TOPICS:

Auditor's Responsibility to Detect Fraud

14. Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for all other engagements. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 16. Rationalization is one element of the Fraud Triangle. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-01 - LO: 02-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Defined 17. Once the fraud assessment is complete in the planning stage, the auditor need not consider fraud further. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance 18. Pressure upon management to manipulate financial information is a common characteristic in fraud cases. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 19. Management compensation that is tied to profits may create incentives to commit fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 20. Management may feel pressure to maintain debt covenants, which is a deterrent to fraud. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 21. Audit procedures to detect fraud are generally an expansion of normal audit procedures. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-03 - LO: 02-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Recent History of Fraudulent Financial Reporting 22. Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 23. A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 24. Rationalization involves the mindset of the fraudster to justify committing the fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 25. The auditor should not consider that fraud is present in revenue accounts because revenue is not typically a very complex account. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-03 - LO: 02-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Recent History of Fraudulent Financial Reporting 26. Management always uses journal entries to commit fraud because they are not reviewed by auditors. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 27. Auditors must keep a questioning mind when analyzing management responses to inquiry and auditors should strive to obtain corroborating evidence before accepting the management responses. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 28. The auditor must perform a brainstorming session with client management in order to plan the procedures to be performed. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 29. According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 30. One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Identify Fraud Risk Indicators

31. The audit team should develop its own ideas about how fraud may be performed by the client and then covered up. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures 32. Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures 33. When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to the engagement. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures 34. Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance 35. When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures 36. The Sarbanes-Oxley Act significantly enhanced criminal penalties for crimes involving the destruction or alteration of corporate audit records. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 37. During the time period of 1998 to 2007, the median size of public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years). a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 38. According to COSO studies, the majority of the frauds took place at companies that were listed on the OverThe-Counter (OTC) market, rather than those listed on the NYSE or NASDAQ. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 39. Auditors are responsible to fraud even if it has an immaterial effect on the financial statements.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Major Frauds and Audit Procedures 40. The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Major Frauds and Audit Procedures 41. Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Indicators 42. Transparency is a desirable, but not critical, element of effective corporate governance. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 43. The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 44. According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members.. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 45. The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that management is honest. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Audit Procedures and to Fraud Risk 46. Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional Skepticism 47. The objective of financial reporting is to provide useful information to interested users. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Corporate Governance and Auditing

48. Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Corporate Governance and Auditing 49. The audit committee is a subcommittee of the board of directors comprised of independent outside directors. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Enhanced Role of Audit Committees 50. Implementing an effective ethical environment is primarily the responsibility of the audit committee of the Board of Directors. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Required Audit Firm Communication to the Audit Committee Corporate Governance Responsibilities 51. Any major disagreement the auditor has with management should be discussed with the audit committee. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance TOPICS:

Required Audit Firm Communication to the Audit Committee

52. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Corporate Responsibility for Financial Reporting 53. An audit must be performed by persons who can make sound judgments relating to complex accounting issues. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 54. The audit committee must be composed of outsiders such as the organization's attorney and audit partner. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Enhanced Role of Audit Committees 55. Management of companies should have the ability to hire and fire the external auditor. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Enhanced Role of Audit Committees 56. The audit committee should have the authority to hire and fire the external auditor.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Enhanced Role of Audit Committees 57. Formulating corporate strategy and risk management policy is primarily the responsibility of the Board of Directors. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Improved Corporate Governance 58. Audit committees of publicly traded companies must establish whistleblowing mechanisms within the company. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Required Audit Firm Communication to the Audit Committee 59. Why is fraud detection an important part of the audit? 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview 60. One of the primary goals of the PCAOB is to restore confidence in which group?

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance a. The SEC.. b. Boards of Directors. c. Internal auditors. d. Independent auditors..

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-04 - LO: 02-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Overview of the Auditor's Fraud-Related Responsibilities 61. Which of the following represents the size of company that has historically committed fraudulent financial reporting or that has experienced asset misappropriation by its employees? a. Large corporations. b. Middle-market corporations. c. Small and start-up companies. d. All companies.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Magnitude of Fraud 62. What is the primary determinant 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 affected.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 63. Which of the following statements reflects an auditor’s responsibility for detecting fraud? a. An auditor is not responsible for discovering fraudulent acts involving employee collusion. b. The audit should be planned to detect only fraud caused by departures from GAAP. c. An auditor is only responsible for detecting fraudulent financial reporting. d. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 64. Which of the following best represents fraud related to financial reporting? 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 decreases warranty expense by $3 million because the company will otherwise miss 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.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 65. According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting? 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 decreasing cash and 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 66. What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening? a. Skimming. b. Ponzi Scheme c. Channel Stuffing. d. Payroll Fraud.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 67. Which of the following actions was a key element of the Enron audit fraud? a. Capitalizing line costs rather than expensing them. b. Misrepresenting bribes from suppliers as a reduction of operating costs. c. Shifting debt to off-balance sheet special entities. d. Concealing large losses related to securities investments.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-03 - LO: 02-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Recent History of Fraudulent Financial Reporting 68. Which of the following is a stated principle of a NYSE report identifying key core governance principles? a. Members of the Board of Directors should be primarily independent members. b. Effective corporate governance should be viewed as a compliance obligation. c. Effective corporate governance should be integrated with the company’s business strategy. d. The Board of Directors has the primary responsibility for creating a culture of integrity and ethical behavior.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Improved Corporate Governance 69. Which of the following is a specific corporate governance responsibility of Executive Management? a. Approving major changes, such as mergers.. b. Approving non-audit work performed by the audit firm. c. Reviewing the budget of the internal audit function. d. Implementing an effective ethical environment.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Improved Corporate Governance

70. Which of the following is a specific governance responsibility of the Board of Directors of a public corporation? a. Managing and reviewing operations. b. Approving corporate strategy. c. Implementing effective internal controls. d. Selecting the external audit firm.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Improved Corporate Governance 71. Who is most often involved in perpetrating fraudulent financial 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: User Expectations of Auditor Responsibility 72. What is the best way an auditor can detect fraud in the financial statements? a. Use professional skepticism. b. Understand Generally Accepted Accounting Standards. c. Brainstorm with the client to find the types of fraud occurring. d. Actively search for errors in the financial statements.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 73. 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.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance 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.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 74. What should an audit team do when it discovers that fraud risk factors are present on an audit engagement? 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.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 75. The fraud triangle says three conditions are generally present in the client’s organization when fraud occurs.

Which of the following is not one of those conditions? a. Incentives. b. Professional Skepticism. c. Opportunity. d. Ability to rationalize fraud.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 76. 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.

ANSWER: c POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Responsibility to Detect Fraud 77. Which of the following best describes professional skepticism? a. An intent to deceive. b. An attitude of intrusion and obstinacy. c. A character that does not waver. d. A questioning mind.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 78. According to professional audit standards, how might an understanding of the nature of fraud that may occur in the client organization be identified by an audit firm? a. Fraud training courses from actual corporate fraud ex-criminals. b. Conducting a brainstorming session with the members of the audit team. c. Circulating a survey to the client company employees for completion. d. Discussions with other audit firms.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 79. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? a. A high turnover of senior management. b. A lack of independent checks. c. A strained relationship between management and the predecessor auditor. d. An inability to generate cash flow from operations.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 80. The Center for Audit Quality (CAQ) report identifies which of the following ways in which individuals involved in the financial reporting process can mitigate the risk of fraudulent financial reporting?

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance a. Individuals involved in financial reporting need to acknowledge that there needs to exist a strong, highly ethical tone at the top of an organization that permeates the corporate culture, including an effective fraud risk management program. b. Individuals involved in financial reporting need to continually exercise professional skepticism. c. Individuals involved in financial reporting need to remember that strong communication among those involved in the financial reporting process is critical. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 81. Which of the following frauds is most common? a. Chief financial officer misappropriation of funds. b. Misapplication of revenue recognition principles. c. Management's theft of cash held in reserve accounts. d. Over-recording expenses related to stock options.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 82. Which of the following is an example of fraud? a. A mistake in processing accounting data. b. An incorrect accounting estimate arising from misinterpretation of facts. c. Misappropriation of an asset. d. A mistake in the application of accounting principles.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 83. Which of the following is a common incentive or condition which increases the likelihood for fraudulent financial reporting? a. Ineffective segregation of assets. b. Addictions to gambling or drugs. c. Pending stock option expirations. d. Access to undeposited cash.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-02 - LO: 02-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Fraud Triangle 84. Which of the following is not an element of the Fraud Triangle? a. Incentive. b. Rationalization. c. Deception. d. Opportunity ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-02 - LO: 02-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Fraud Triangle 85. Protection Transparency, Inc. is being audited by Messer and Bromely, LLP. During the assessment of fraud, Messer and Bromely 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 police. c. The chairman of Protection Transparency's audit committee. d. The predecessor auditor of Protection Transparency.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 86. 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.

ANSWER: a Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 87. 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.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 88. Which of the following statements about the Bernie Madoff ponzi scheme is false? a. Madoff too advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and encourage further investments. b. Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley Act, and the provisions of that Act ultimately led to discovery of the fraud. c. Madoff was sentenced to 150 years in prison. d. The estimated amount missing from client accounts, including fabricated gains, was almost $65 billion.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 89. 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.

ANSWER: c POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 90. There are many important reasons for diligent audit planning. If an audit firm wrongly skips the planning stage of an audit, what will be the effect relative to fraud detection? a. The firm will not be able to apply GAAP 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 GAAS. ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 91. Which of the following statements about fraud or fraud detection is true? a. Management may physically alter evidence to perpetrate and conceal the fraud. b. Fraudulent financial reporting is generally not material enough to consider. c. Journal entries will supply evidence necessary to detect fraud. d. The advent of new technology prevents fraud, thereby leading to less fraud over time.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 92. How did the Sarbanes-Oxley Act strengthen auditor independence? a. By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act. b. By requiring auditors to report the nature of any auditor-client disagreements to the SEC. c. By requiring the lead partner to rotate off the audit engagement at least every five years. d. By requiring a different audit firm from the one that performs the audit to prepare the client’s tax return.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance 93. Which of the following frauds involved primarily asset misappropriation? a. Enron. b. Worldcom. c. Dell. d. Koss.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify Fraud Risk Indicators 94. Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures? a. The type of fraud that may occur. b. The potential materiality of fraud. c. The likelihood of fraud occurring. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Linking Fraud Risk to Audit Procedures 95. How frequently does the PCAOB inspect registered accounting firms that audit 100 or more issuers? a. Annually b. Every two years. c. Every three years d. Every five years.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 96. The PCAOB has how many board members? a. Three b. Five c. Seven d. Nine ANSWER: b Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 97. Which of the following is a responsibility of the PCAOB? a. To set financial reporting standards for public companies. b. To set financial reporting standards for private companies. c. To set audit standards for public companies. d. To set audit standards for private companies.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 98. How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers? a. Annually b. Every two years. c. Every three years. d. Every five years.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 99. According to the Sarbanes-Oxley Act, which of the following items is the independent auditor required to report to the audit committee ? a. Materiality limits for audit testing. b. Critical accounting policies and practices. c. The extent of audit testing in high-risk accounts. d. A list of probable fraud errors identified in audit planning.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking The Sarbanes-Oxley Act of 2002

100. Which action was a key element in the WorldCom audit fraud case? a. Recording bartered exchange transactions as revenue. b. Overstating cash by falsely recording cash held at major banks. c. Recognizing revenue on the sale of impaired assets. d. Concealing large losses related to securities investments.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-03 - LO: 02-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Recent History of Fraudulent Financial Reporting 101. Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms for their audit clients would not impair their independence? a. Systems design. b. Tax services. c. Appraisal services. d. Internal audit services.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 102. Which of the following items are registered audit firms not required to report to the audit committee? a. Critical accounting policies and practices. b. Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm. c. A list of all audit procedures performed. d. Significant written communications between the audit firm and management.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Using Audit Software for Fraud Identification 103. Which of the following statements is true concerning the fraud risk model?

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance a. Assessing incentive is the first phase of the model. b. The fraud risk model should be reviewed with the audit team. c. The fraud risk model should be modified based on a review of internal controls. d. Auditors do not use a fraud risk model.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-04 - LO: 02-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Oveview of the Auditor's Fraud-Related Responsibilities 104. Which of the following is a NYSE mandated guideline for corporate governance? a. Boards need to consist entirely of independent directors. b. Boards must have an audit committee with a minimum of three independent directors. c. Boards must have a compensation committee with a minimum of three independent directors. d. CFOs must provide an annual certification of compliance with corporate governance standards.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Improved Corporate Governance 105. The fraud triangle has three components. Which of the components must be present for a fraud to occur? a. All factors must be present for fraud to occur. b. All factors need not be present. c. Fraud can occur if any one of the factors is present. d. None of the above ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Indicators of Fraud Risks 106. Which of the following best describes how corporate governance influences an organization? a. To exert control over management. b. To hold management accountable for its actions. c. To exert control and require accountability for the resources entrusted to the organization. d. To exert control over the internal control environment.

ANSWER: c Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Improved Corporate Governance 107. Who is responsible for operating an enterprise? a. The auditor. b. The audit committee. c. Management. d. The board of directors.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Corporate Governance and Auditing 108. Which of the following is not a specific responsibility of an audit committee as mandated by the NYSE? a. Discussing the company’s financial statements with the external auditor. b. Setting hiring policies for former employees of the external auditor. c. Creating and implementing internal controls. d. Discussing financial information provided to analysts.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-06 - LO: 02-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Improving Corporate Governance 109. Which of following best describes the audit committee’s oversight responsibility? a. Provide oversight of reporting outside the organization. b. Provide oversight of internal auditing function. c. Provide oversight of the external audit. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Enhanced Role of Audit Committees 110. Which of the following facts should be communicated by the auditor to the audit committee?

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance a. The auditor's responsibilities under GAAP. b. Significant difficulties they had with management during the conduct of the audit.. c. Significant accounting policies. d. All are required communications.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Enhanced Role of Audit Committees 111. Which of the following is not one of management’s responsibilities? a. Ensuring accounting principles are following in preparing financial statements. b. Engaging a qualified auditor. c. Implementing effective internal controls. d. Ensuring financial statements and disclosures are accurate.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Corporate Responsibility for Financial Reporting 112. Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002? a. Certify the accuracy of financial statements. b. Establish a corporate code of conduct. c. Designing internal controls. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.02-05 - LO: 02-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Sarbanes-Oxley Act of 2002 113. Fraud motivations and factors Research consistently shows that there are three factors associated with most frauds. List these factors and at least three indicators that the factor may exist for a particular company.

ANSWER: Factor Indicators -Management compensation schemes.

-Financial pressure to improve trends.

Incentives or Pressures -Personal need for financial enhancement.

-Compliance with debt covenants.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance

Opportunities

Attitudes or Rationalization

-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 nonexistent 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!"

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Identify and analyze significant fraud risk factors 114. 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?

ANSWER: Understand the nature of fraud, the motivations to commit fraud, and the 1. manner in which fraud may be perpetrated.

Exercise “professional skepticism” throughout the entire fraud risk assessment 2. process.

3. “Brainstorm” and share knowledge with other audit team members.

4. Obtain information useful in identifying and assessing fraud risk.

Identify the specific fraud risks, including potential magnitude, and areas 5. likely to be affected by a fraud.

Evaluate the quality of the company’s controls and potential effectiveness in 6. mitigating the risk of fraud.

Respond, i.e. adjust audit procedures to assure that the audit adequately 7. addresses the risk of fraud and provides evidence specifically related to the possibility of fraud.

Evaluate findings. If evidence signals that a fraud might exist, determine 8. whether or not forensic or specialist auditors are needed to complete the investigation.

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance Communicate the possibility that fraud exists to management, or to the audit 9. committee or the full board if the fraud is material and/or involves members of management.

Document the audit approach starting with the step 1 through the completion 10. of all of the steps identified above.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Assessment and Detection Procedures 115. Fraud consideration by auditors John Beasley is interviewing with public audit 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.

ANSWER: 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; rather, 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’s perspective will likely not be acceptable to the audit firm because his attitude toward fraud is not rigorous enough for the profession.

John must realize that, quite often, fraud in organizations usually takes place in one of three areas: 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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 116. PCAOB Independence Standards What are four requirements of the Sarbanes-Oxley that seek to protect auditor independence?

ANSWER: Sarbanes-Oxley: Auditor Independence Cengage Learning Testing, Powered by Cognero

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance 201 Services outside the scope of practice of auditors. There exist a variety of services that registered audit firms may not perform for issuers, such as bookkeeping, systems design, appraisal services, and internal auditing, among others. Tax services may be performed, but only with pre-approval by the audit committee.

202 Preapproval requirements. All audit and non-audit services (with certain exceptions based on size and practicality) must be approved by the audit committee of the issuer.

203 Audit partner rotation. The lead partner and reviewing partner must rotate off the issuer engagement at least every five years.

204 Auditor reports to audit committees. Registered audit firms must report to the audit committee issues concerning: • Critical accounting policies and practices • Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm • Significant written communications between the audit firm and management 206 Conflicts of interest. Registered audit firms may not perform audits for an issuer whose CEO, CFO, controller, chief accounting officer, or other equivalent position was employed by the audit firm during the one –year period preceding the audit. This is known as a “cooling off period. ” POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview 117. Enron: A Fraud Example What were the failures that allowed the Enron fraud to occur?

Weak Management Accountability. Management was virtually not accountable to anyone ANSWER:

as long as the company showed dramatic stock increases justified by earnings growth.

Incompetent Corporate Governance. Although the board appeared to be independent, most of the board members had close ties to management of the company through philanthropic organizations.

Accounting Rules. Accounting became more rule-oriented and complex. Accounting allowed practitioners to take obscure pronouncements, such as those dealing with Special Purpose Entities that were designed for leasing transactions, and apply the pronouncement to other entities for which such accounting was never intended.

Enthusiastic Financial Analyst Community. Financial analysts that were riding the bubble of the dot-com economy concluded they did not have tools to appropriately value many of the emerging companies.

Biased Banking and Investment Banking. Many large financial institutions were willing participants in the process because they were rewarded with large underwriting fees for other Enron work.

Lack of an Independent External Auditor. At the time of Enron, the largest five external auditing firms referred to themselves as professional service firms with diverse lines of business. All of the firms had large consulting practices. Arthur Andersen performed internal audit work for Enron, in addition to performing the external audit. The consulting fees of many clients dramatically exceeded the audit fees. Partners were compensated on

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance revenue and profitability. Worse yet, auditors were hired by management who sometimes succeeded in pressuring auditors to acquiesce to aggressive financial reporting preferences.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Major Frauds and Audit Procedures 118. Fraud categories What are three common ways in which fraudulent financial reporting takes place?

ANSWER: 1. Manipulation, falsification, or alteration of accounting records or supporting documents.

2. Misrepresentation or omission of events, transactions, or other significant information 3. Intentional misapplication of accounting principles POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Types of Frauds 119. Audit Committee Responsibilities Describe the responsibilities of audit committees, and list at least four responsibilities that the NYSE has mandated for audit committees.

Section 301 of the Sarbanes-Oxley Act outlines the responsibilities of audit committee ANSWER:

members for publicly traded companies, stating that audit committees are to be directly responsible for the appointment, compensation, and oversight of the work of registered accounting firms; they must be independent; they must establish “whistleblowing” mechanisms within the company; they must have the authority to engage their own independent counsel; and companies must provide adequate funding for audit committees.

In addition to these broad responsibilities, the NYSE has mandated certain specific responsibilities of audit committees, including: ∙ Obtaining each year a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor ∙ Discussing the company’s financial statements with management and the external auditor ∙ Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts ∙ Discussing in its meetings policies with respect to risk assessment and risk management ∙ Meeting separately with management, internal auditors, and the external auditor on a periodic basis ∙ Reviewing with the external auditor any audit problems or difficulties that they have had with management ∙ Setting clear hiring policies for employees or former employees of the external auditors ∙ Reporting regularly to the board of directors In addition to these responsibilities, in many companies the audit committee also has the authority to hire and fire the head of the internal audit function, set the budget for the

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Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance internal audit activity, review the internal audit plan, and discuss all significant internal audit results. Other responsibilities might include performing or supervising special investigations, reviewing policies on sensitive payments, and coordinating periodic reviews of compliance with company policies such as corporate governance policies.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risks That May Lead to Material Misstatement 120. 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?

ANSWER: 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 POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor's Response to Fraud Risk Factors

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 2. Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 3. The quality of an organization's internal control will affect both the audit approach and the amount of testing needed for an engagement. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 4. Control activities are the component of internal control that includes control actions that have been established by policies and procedures a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 5. Control activities implemented to mitigate transaction processing risk that typically affect only certain Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors processes, transactions, accounts, and assertions are referred as transaction or application controls. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations 6. An organization’s commitment to integrity is demonstrated through the tone set by the board and management. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-03 - LO: 03-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Components and Principles of Internal Control 7. Effective control not only identifies risk but also responds to these risks appropriately. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 8. Controls to monitor results of operations are considered to be transaction controls. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-02 - LO: 03-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Defining Internal Control 9. Preventive controls are designed to prevent the occurrence of a misstatement. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Control Activities Component of Internal Control 10. Generally, highly regulated entities have more complex control activities than less-regulated entities. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component- Control Activities 11. The better the quality of the internal controls, the more an auditor can rely on the controls. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Importance of Internal Control to Financial Statement Audits 12. The five major components of an organization's internal control are: the control environment, risk assessment, control activities, information and communication, and monitoring. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 13. A company's internal auditing function should not be considered when assessing the effectiveness of internal controls. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Environment 14. An organization's control environment is established and maintained by the internal auditing department. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 15. A material weakness in internal control is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Examples of Common Internal Control Activities 16. Physical controls are necessary to protect and safeguard assets from accidental or intentional destruction and theft. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Examples of Common Internal Control Activities 17. Monitoring of the internal controls involves assessment by appropriate personnel of the design and operation of controls on a timely basis and taking necessary actions. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 18. An auditor needs to understand a company’s internal controls in order to anticipate the types of material misstatements that may occur. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-01 - LO: 03-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Importance of Internal Control Over Financial Reporting 19. Segregation of duties is a control activity that is designed to protect against the risk that an individual could both perpetrate and cover up a fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Examples of Common Internal Control Activities 20. In addition to controls being specific, they may be broad, such as policies regarding a code of ethics. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 21. Physical controls to safeguard assets are not intended to include simple controls such as fences and locks. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Examples of Common Internal Control Activities

22. Self-checking digit algorithms have been developed to test for transposition errors associated with identification numbers a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations 23. Preventive controls are generally more cost-efficient than detective controls. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 24. A walkthrough involves following a transaction back from when it is reflected in the financial records to when it originated to determine if the controls are effectively designed and have been implemented. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 25. Performing a walkthrough provides an understanding of the nature of processing in important accounting applications. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors TOPICS:

Auditor Evaluation of Internal Controls

26. The payroll department should be responsible for signing payroll checks. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 27. A strong control environment can reduce all the financial reporting risks to zero. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 28. Management’s risk assessment process should be performed only by senior-level management. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-04 - LO: 03-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Risk Assessment 29. Corporate policies designed to attract, train, and evaluate competent employees are considered to be control activities in the COSO framework for internal controls. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-03 - LO: 03-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component- Control Environment Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 30. Management is obligated to report significant deficiencies in the control structure in their annual report on internal control effectiveness required by the Sarbanes-Oxley Act. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-08 - LO: 03-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management's Responsibilities Related to Internal Control over Financial Reporting 31. One of the advantages of a computerized accounting system is that the computerized system eliminates the need for internal controls. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations 32. A transaction trail includes the documents and records that allow an auditor to trace a transaction from its origination through to its final disposition, or vice versa. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 33. Several significant deficiencies in internal controls may constitute a material weakness. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 34. Management should test all internal controls for effectiveness when performing their annual evaluation of the internal control structure. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-08 - LO: 03-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management's Responsibilities Related to Internal Control Over Financial Reporting 35. Managers must use professional judgment to determine whether identified control deficiencies rise to the level of a significant deficiency or material weakness. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management Reports on Internal Control over Financial Reporting 36. Walkthroughs and inquiries are often used to obtain an understanding of internal controls. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 37. A deficiency in design of internal controls exists when an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 38. Segregation of duties is considered a part of the monitoring component of the COSO framework for internal control structure. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 39. A well-controlled organization has an appropriate structure and clearly defined lines of responsibility and authority where everyone in the organization has equal responsibility for the effective operation of internal control. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 40. Transaction oriented controls are designed to ensure that transactions are properly valued. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 41. All organizations should evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors TOPICS:

Management Reports on Internal Control over Financial Reporting

42. Preventive controls are designed to provide reasonable assurance that the correct program is used for processing, all transactions are processed, and the transactions update appropriate files. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Importance of Internal Control to Financial Statement Audits 43. 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 44. A material control weakness is a deficiency in internal control such that a reasonable probability exists that a material misstatement of the company’s financial statements may not be prevented or detected on a timely basis.. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-08 - LO: 03-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management's Responsibilities Related to Internal Control Over Financial Reporting 45. Control activities may be implemented at the organizational level and at the transactional level. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking COSO: A Framework for Internal Control

46. The quality of an organization's internal controls affect which of the following? 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Importance of Internal Control to Financial Statement Audits 47. 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. Operational Effectiveness. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 48. 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 statement 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 49. Which one of the following groups is interested in an organization's control structure? a. Board members. b. Lenders.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors c. Auditors. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 50. With whom does the tone of internal control typically originate? a. Auditors. b. Employees. c. Management. d. Stockholders.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 51. Which of the following is not included as a components of an organization's internal control structure in the COSO framework? a. Control risk. b. The control environment. c. Risk assessment. d. Control activities.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 52. What is the primary benefit of effective internal control in an organization? a. Achievement of certain organizational goals. b. Completion of a successful audit for the entity. c. Shareholder involvement in the company’s success. d. Obtaining profitability and financial strength.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors TOPICS:

Importance of Internal Control to Financial Statement Audits

53. Which one of the following COSO components of internal controls influences the tone for the organization? a. Control risk assessment. b. Control environment. c. Information and communication. d. Monitoring.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 54. Which of the following is not part of the control environment? a. Management philosophy and operating style. b. Methods of assigning authority and responsibility. c. Personnel policies and practices. d. Control activities.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 55. Which of the following is not one of the underlying principles of an effective control environment as developed by COSO? a. The organization demonstrates a commitment to integrity and ethical values. b. The board of directors demonstrates independence from management and exercises oversight for the development and performance of internal control. c. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in pursuit of objectives. d. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 56. Which of the following is a major component of an organization's internal control structure? a. Major new financing. b. The financial environment.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors c. Risk assessment. d. Telecommunication equipment.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 57. Which COSO component of internal control concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objectives? a. Control activities. b. Information and communication. c. Monitoring. d. Control environment.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 58. Which of the following services does the PCAOB require auditors of public companies to perform? a. A financial statement audit and an attest audit. b. A financial statement audit and an assurance audit. c. A financial statement audit and agreed upon procedures. d. A financial statement audit and an examination of the effectiveness of internal controls.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 59. The information and communication component of internal control includes which of the following? a. The organization deploys control activities through policies that establish what is expected and in procedures that put policies into action. b. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control. c. The organization identifies and assesses changes that could significantly impact the system of internal control. d. All of the above.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 60. Which of the following best describes the purpose of personnel policies and procedures? a. Ensure the organization hires the right people. b. Ensure the organization complies with federal and state laws in its hiring and retention decisions. c. Ensure the organization has employees that are properly trained and supervised. d. Ensure the organization performs all of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 61. Which of the following is not part of management’s report on internal controls? a. Management responsibility for control of financial reporting. b. The framework used to evaluate internal control. c. An assessment of the effectiveness of the company's internal control. d. A statement indicating the extent of tests performed to assess controls.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-08 - LO: 03-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management's Responsibilities Related to Internal Control Over Financial Reporting 62. Which one of the following represents a control deficiency? a. A missing control that is required for achievement of objectives. b. A control that operates as designed. c. A control that ensures the reliability of financial reporting. d. A control that does not prevent immaterial errors.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management Reports on Internal Control over Financial Reporting 63. Internal controls may be preventive or detective.Which of the following controls is preventive? a. Requiring two persons to open mail containing payments.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors b. Reconciling the accounts receivable subsidiary file with the control account. c. Using batch totals. d. Preparing bank reconciliations.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 64. Which of the following is an inherent limitation of internal controls? a. Lack of auditor independence. b. Collusion. c. Separation of duties. d. Employee peer review.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations 65. In an Integrated Audit, what is the independent external auditor primary concerned with? a. Detecting all errors. b. Determining the effectiveness of operations. c. Determining whether the internal controls are effective. d. Determining whether the controls promote efficiency.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-01 - LO: 03-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Importance of Internal Control Over Financial Reporting 66. The COSO principle that an organization should identify and assess changes that significantly impact the system of internal control is related to which COSO component? a. Control Environment b. Risk Assessment c. Control Activities d. Monitoring ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors LEARNING OBJECTIVES: AUDT.JOHN.16.03-03 - LO: 03-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Components and Principles of Internal Control 67. Which of the following is considered to be an entity-wide control? a. Segregation of duties. b. Controls over management override. c. Authorization procedures for purchasing. d. Adequately documented transaction trails.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-02 - LO: 03-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Defining Internal Control 68. Which of the following is considered to be a transaction control? a. Controls to monitor other controls. b. Policies that address significant business control practices. c. Centralized processing controls. d. Physical controls to safeguard assets.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-02 - LO: 03-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Defining Internal Control 69. Requiring the mail clerk to prepare a listing of all checks received, with copies of the list going to the cashier and to accounting, is an example of which type of control? a. Preventive. b. Corrective. c. Detective. d. Directive.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 70. Which of the following best represents a walkthrough? 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 recorded write-offs to ensure they have been properly approved. d. The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 71. Which one of the following is an example of an internal risk for an organization? a. Changes in internal information technology. b. Increases in substitute services or products. c. Changes in the reliability of source goods. d. Changes in regulation that make the business model unsustainable.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-04 - LO: 03-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Risk Assessment 72. Which of the following is another name for transaction controls?: a. Entity-wide controls. b. Application controls. c. Supporting controls. d. Detail controls.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 73. Which of the following is an example of a physical control to safeguard assets? a. Hiring only trustworthy cashiers. b. Separation of duties.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors c. Locks on the warehouse doors. d. Safety audits on the production-line.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Examples of Common Internal Control Activities 74. A control designed to ensure that no employee is paid for more than 80 hours of sick pay is an example of which type of control? a. Entity-wide control. b. Processing control. c. Output control. d. Input control.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 75. 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 76. An edit test is considered to be which type of control? a. An input control. b. A processing control. c. An output control d. A supporting control.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 77. Which of the following is not a way management obtains evidence regarding the effectiveness of internal control over the accounting system? a. Performing a walkthrough of the accounting system. b. Making inquiries of banks and attorneys. c. Reviewing system flowcharts. d. Taking plant and operational tours.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 78. A control designed to ensure that sales transactions are generated using the company’s most current prices would be considered to be which type of control? a. An input control. b. A processing control. c. An output control. d. A physical control.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 79. Internal control is a process affected 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 80. A control designed to ensure that the number of sales transactions recorded in the accounting records matches the number of sales invoices entered during processing is known as which type of control? a. Input control. b. Processing control. c. Output control. d. Edit control.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 81. Requiring two signatures on any check in excess of $10,000 is an example of which type of control? a. Input control. b. Preventive control. c. Detective control. d. Processing control.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 82. Which of the following is an example of a control environment deficiency?? a. A low level of control consciousness within the organization. b. An audit committee that does not have independent members. c. An audit committee that is not viewed as the client of the external auditor. d. All of the above.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 83. A bank reconciliation is an example of which type of control? a. An input control. b. An output control. c. A preventive control.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors d. A detective control.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 84. Security management practices which limit access to technologies is a function included in which COSO component of internal control structure? a. Control Environment. b. Risk Assessment. c. Control Activities. d. Monitoring.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-05 - LO: 03-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO Component: Control Activities 85. In a large company, who usually monitors the internal control? a. Internal auditors. b. PCAOB. c. CFO. d. External auditors.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 86. Which of the following is not true of internal control as defined by COSO? a. It is narrower than internal control over financial reporting. b. It is a process that includes all elements of internal control working together. c. It includes all the people in the organization. d. It starts at the top of the organization in setting a tone.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking COSO: A Framework for Internal Control

87. Which of the following is not true of the concepts that are embodied in the COSO framework of internal controls? a. Internal controls relate to the organization’s objectives. b. The six components of internal control are logically and operationally intertwined. c. Internal controls apply across all activities of the organization. d. All of the above are true.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 88. Which of the following is not a major component of an organization’s internal controls? a. Risk assessment. b. Control environment. c. Control activities. d. Control risk.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 89. 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.

ANSWER: e POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 90. Which of the following is an example of a detective control in an information system? a. Automated reports to management that specifically identify delinquent receivables. b. A requirement that salaried employees submit written requests to work overtime.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors c. Assurance from top management that computer centers are kept locked. d. The employment of trustworthy people to enter data into the information system.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 91. Which statement is true concerning the documentation of internal control? a. Documentation should be sufficient to support the design and operating effectiveness of internal controls. b. Documentation requirements are standardized by the PCAOB. c. Documentation of disbursements require paper and electronic documentation. d. Documentation of all transaction controls should be tested on an annual basis.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.03-08 - LO: 03-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Management's Responsibilities Related to Internal Control Over Financial Reporting 92. Which component of COSO’s internal control system concerns the process that provides feedback on the effectiveness of the other four components of internal control? a. Information and communication. b. Monitoring. c. Control activities. d. Risk assessment.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 93. Which of the following is the most severe? a. Material weaknesses in internal control. b. Significant deficiencies in internal control. c. Operational deficiencies in internal control. d. Each is equally severe because it could result in inaccuracies in financial reporting.

ANSWER: a POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Documenting the Auditor's Understanding and Assessment of an Organization?s Internal Controls 94. Internal control Define the term "internal control" and identify the major components of an internal control system.

ANSWER: Internal control is a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

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

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 95. 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.

ANSWER: 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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors TOPICS:

COSO: A Framework for Internal Control

96. Internal control components and principles For each of the five components of internal control, list at least two related principles of internal control. n gathering the information and briefly describe each one.

Internal Control Components and Principles ANSWER: COMPONENTS PRINCIPLES 1. The organization demonstrates a commitment to integrity and ethical values.

2. The board of directors demonstrates independence of management and exercises oversight for the development and performance of internal control.

3. Management establishes, with board oversight, structures, reporting lines, and CONTROL ENVIRONMENT appropriate authorities and responsibilities in the pursuit of objectives.

4. The organization demonstrates a commitment to attract, develop, and retain competent individuals in alignment with objectives.

5. The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.

6. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.

7. The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining RISK ASSESSMENT how the risks should be managed.

8. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

9. The organization identifies and assesses changes that could significantly impact the system of internal control.

10. The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.

CONTROL ACTIVITIES 11. The organization selects and develops general control activities over technology to support the achievement of objectives.

12. The organization deploys control activities as manifested in policies that establish what is Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors

INFORMATION AND COMMUNICATION

MONITORING

expected and in relevant procedures to effect the policies.

13. The organization obtains or generates and uses relevant, quality information to support the functioning of other components of internal control.

14. The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of other components of internal control.

15. The organization communicates with external parties regarding matters affecting the functioning of other components of internal control.

16. The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning.

17. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 97. Internal Control Principles Identify and briefly describe the two principles that should govern the monitoring function.

1. The organization selects, develops, and performs ongoing and/or separate evaluations ANSWER:

to ascertain whether the components of internal control are present and functioning.

Ongoing evaluation are procedures built into the normal recurring activities of an entity.Separate evaluations are conducted periodically, typically by objective management personnel, internal auditors, or external consultants.

2. The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

Control deficiencies identified through monitoring or other activities need to be communicated to appropriate personnel such as management or the board of directors so that appropriate corrective action can be taken.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking COSO: A Framework for Internal Control

98. Integrated audit Explain the application of an integrated audit as it relates to regulation. Discuss the reasons that this integrated approach may occur.

ANSWER: The Sarbanes-Oxley Act of 2002 requires reporting by management of publiclyheld companies on the effectiveness of internal control over financial reporting. The Public Company Accounting Oversight Board (PCAOB) requires the external auditor to perform an integrated audit of the effectiveness of internal controls and financial reporting. In other words, the same auditor must attest to both the financial statements and management’s assertions regarding the effectiveness of internal controls over financial reporting.

Because of the above mentioned regulatory requirements, auditors will perform an audit on both financial statements and internal controls for all public clients.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations 99. Internal Control Principles One of the COSO principles of internal control requires organizations to demonstrate a commitment to attract, develop, and retain competent individuals in alignment with objectives. Discuss how this can be done.

ANSWER: Commitment to competence includes management ’s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge. This commitment is demonstrated through policies and procedures to attract, train, mentor, evaluate, and retain employees POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Risk Assessment and Audit Tests 100. COSO: A Framework for Internal Control What is internal control as defined by COSO? Also explain, the other elements of the definition that are important to internal control ANSWER: COSO defines internal control as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: (1) reliability of financial reporting, (2) compliance with applicable laws and regulations, and (3) effectiveness and efficiency of operations.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors Other elements of the definition that are important: * Is a process designed to accomplish the organization’s objectives. * Starts at the top of the organization with the board of directors and management creating and reinforcing a structure and a tone for controls in the organization. * Directly or indirectly includes all people in the organization, ranging from the shipping clerk to the internal auditor to the chief financial officer. * Is broader than internal control over financial reporting.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control 101. Pervasive control activities Discuss what pervasive control activities are and provide an example of at least three.

ANSWER: 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 POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Examples of Common Internal Control Activities 102. Management Evaluation of Internal Controls What are the steps in management’s evaluation of internal control over financial reporting?

ANSWER: Integrated audit process includes the following steps: 1. Identify financial reporting risks.

2. Identify control that mitigate financial reporting risk 3. Assess design effectiveness 4. Select and perform testing procedures to evaluate operating effectiveness 5. Document operating effectiveness 6. Evaluate control deficiencies 7. Provide pubic disclosure of management report Cengage Learning Testing, Powered by Cognero

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Evaluation of Internal Controls 103. IT Controls Integrated into Internal Control Evaluations Explain input controls.

ANSWER:

The control procedures designed to assure that the organization fully captures all the transactions between itself and another entity, and to properly record those transactions, are referred to as input controls.

Input controls are designed to ensure that authorized transactions are correct, complete, and recorded in a timely fashion and that only authorized transactions exist. They include: * Input validation tests * Self-checking digits POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: IT Controls Integrated into Internal Control Evaluations 104. 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 1 2 3 4 5

ANSWER:

Description

1. Control environment The component of internal control that includes the set of standards, processes, and structures that provides the basis for carrying out internal control across the organization.

2. Risk assessment The component of internal control that is the process for identifying and assessing the risks that may affect an organization from achieving its objectives.

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Chapter 3 - Internal Control Over Financial Reporting: Responsibilities of Management and the External Auditors 3. Control activities The component of internal control that includes control actions that have been established by policies and procedures.

4. Information and communication The component of internal control that refers to the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objectives.

5. Monitoring The component of internal control that determines whether the controls, including all five components, are present and continuing to function effectively.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: COSO: A Framework for Internal Control

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities 1. Under Common Law, liability concepts are developed through court decisions based on negligence, gross negligence, or fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 2. Public confidence is mostly maintained by the public accounting profession through integrity based on personal moral standards and it is reinforced by codes of conduct. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 3. An individual does not need to agree to uphold the code of professional conduct in order to become licensed as a CPA. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 4. A covered member’s investment in a mutual fund which owns stock in a firm being audited by the covered member is a direct financial interest resulting in the impairment of independence. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities TOPICS:

AICPA Code of Professional Conduct

5. Liability concepts developed through court decisions are referred to as statutory law. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-02 - LO: 04-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Applicable Laws and Causes of Legal Action 6. In federal lawsuits, Congress has limited the extent of joint and several liability damages to the actual percentage of responsibility if auditors are found liable for less than 75% of damages. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-01 - LO: 04-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms 7. Class action lawsuits are designed to encourage multiple lawsuits arising from the same claim. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-01 - LO: 04-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms 8. The expectations gap related to shareholders’ beliefs about recovery of losses on investments serves as a deterrent to lawsuits filed against audit firms. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities LEARNING OBJECTIVES: AUDT.JOHN.16.04-01 - LO: 04-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms 9. The Principles of the AICPA Code of Professional Conduct provide a very detailed set of rules that represent a low level of actions. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 10. The Rules of Conduct govern the performance of CPAs in carrying out their public responsibilities. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 11. Confidentiality is the cornerstone of the auditing profession. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 12. Negligence is the failure to exercise minimal care. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities LEARNING OBJECTIVES: AUDT.JOHN.16.04-02 - LO: 04-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Legal Environment and the Effects of Lawsuits on Audit Firms 13. The AICPA's Code of Professional Conduct defines an indirect financial interest as an investment of one percent or less of a client's organization, and because the amount is so small it is considered immaterial a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 14. Gross negligence is a failure to use even minimal care or evidence of activities that show a recklessness or careless disregard for the truth. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 15. Auditors are permitted to perform for a contingent fee an audit of the financial statements if the audit committee approves the agreement in advance of the services being provided. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 16. The confidentiality between auditor and client is legally equivalent as the confidentiality shared between attorney and client. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 17. Contingent fees are prohibited for tax professionals when preparing tax returns for clients a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 18. Contingent fees are prohibited for any client for which the auditor performs audit services, but are otherwise permitted. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 19. Commissions and referral fees are allowed to audit firms as long as the audit client is informed of the fees. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 20. According to the framework for professional decision making, the first step in decision-making is to structure the audit problem a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: A General Decision-Making Framework 21. According to Rights Theory, the highest-order rights include rights granted by the government, such as civil rights, legal rights, rights to own property, and license privileges. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-05 - LO: 04-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: A Framework for Ethical Decision Making 22. A CPA firm may include the name of only one past owner in the firm name. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 23. An ethical dilemma occurs in a situation in which moral duties or obligations conflict. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 24. An ethical dilemma occurs an ethically correct action may conflict with an individual’s immediate selfinterest. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 25. The expectations gap represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 26. The deep pocket theory represents a misunderstanding whereby shareholders mistakenly believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 27. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties involved. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 28. There is a hierarchy of rights to consider when applying rights theory. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 29. On an audit, only CPAs are required to comply with the AICPA’s independence rules. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 30. A covered member under the AICPA’s rules includes individuals on the engagement team, any individual in a position to influence the engagement team, and all professional staff in the office of the engagement. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 31. The Principles of the AICPA Code of Professional Conduct express the accounting profession’s recognition of its responsibilities to client management. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 32. Rule 102 on integrity and objectivity only applies to covered members as defined by the AICPA. Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 33. The AICPA may revoke a member’s CPA license for violations of its Code of Professional Conduct. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 34. A new staff member on an audit engagement may own stock in that client until the audit report is issued. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 35. A contingency fee is a situation in which no fee will be charged unless a specified finding or result is attained. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities 36. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy of rights that should be considered in solving ethical dilemmas. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Ethical Theories 37. Communication between an auditor and an audit client is deemed to be privileged communication in most states. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 38. Rule 102, Integrity and Objectivity,of the AICPA Professional Code of Conduct, does not apply to a CPA who is a corporate CFO. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Professional Code of Conduct 39. Loans between the auditor and the client are permitted in some circumstances. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking AICPA Code of Professional Conduct

40. The auditor is permitted to violate the confidentiality rule in providing relevant information to an inquiry by a major shareholder of the client. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 41. Which of the following is not one of the reasons for increased litigation related to audits? a. Class action lawsuit. b. Increased complexity of accounting standards. c. Contingent-fee-based compensation for law firms. d. Joint and several liability doctrines.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-01 - LO: 04-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: The Legal Environment and the Effects on Lawsuits of Audit Firms 42. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns shares of stock in McBurgers Corporation, then what is Pulley considered to have? a. An immaterial indirect financial interest in McBurgers Corporation. b. A material indirect financial interest in the McBurgers Corporation. c. A loophole for claiming independence from McBurgers Corporation. d. An direct financial interest in McBurgers Corporation.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 43. Which of the following employment positions could an auditor’s spouse hold in a client without violating the independence requirements? a. Controller.

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities b. Treasurer. c. Order entry staff. d. Internal audit director.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 44. Liability based on federal securities law is known as which type of law? a. Common Law b. Contract Law c. Commercial Law d. Statutory Law ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-02 - LO: 04-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Applicable Laws and Causes of Legal Action 45. Julie Webb, CPA takes out an automobile loan with First National Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First National Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month.

Which of the following best describes Julie’s independence status? a. Impaired because Julie has a direct financial interest in FNBW. b. Impaired because Julie has a material indirect financial interest in FNBW. c. Not impaired because Julie has an immaterial indirect financial interest in FNBW. d. Not impaired because Julie is permitted to take normal loans from FNBW. ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 46. Julie Webb, CPA takes out an automobile loan with First national Bank of Wellville (FNBW) while attending the University of Wellville. Julie graduates one year later and is hired as an auditor by Best and Driftwood, LLP. Her first assigned audit engagement is with First national Bank of Wellville, a client of Best and Driftwood. As a new audit assistant, Julie continues to pay her automobile loan payments each month.

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities According to the AICPA, why is Julie is considered a covered member for FNBW independence purposes? a. She will be working on the engagement. b. She has a direct financial interest in FNBW. c. She graduated in the same area as the client is operating. d. She has an immaterial direct financial interest in FNBW. ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 47. Which of the following is a principle of the Code of Ethics of the International Ethics Standards Board for Accountants but not a principle found in the AICPA Professional Code of Conduct? a. Integrity b. Professional Behavior c. Confidentiality d. Objectivity ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 48. Which of the following represents a situation in which an auditor is independent of its client? a. The audit fee paid by the client represents 10% of the auditor’s annual gross revenue. b. The auditor takes a personal loan from the president of the company. c. The auditor’s dependent son holds 25 shares of the client’s common stock. d. The auditor has not received payment for the previous audit services.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Professional Code of Conduct 49. For which of the following engagements are members of the AICPA required to act with integrity and objectivity? a. Tax preparation.

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities b. Financial statement review services. c. Financial statement audits. d. All engagements.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 50. The concept of the Third-Party Beneficiary Test was established by which court case? a. Credit Alliance Corp. v. Arthur Andersen & Co.. b. Ultramares Corp. v. Touche. c. Citizens State Bank v. Timm, Schmidt, & Co.. d. Rosenblum v. Adler.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-03 - LO: 04-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Liability under Common Law and Contract Law 51. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of Professional Conduct? a. A member must not take on an engagement that is beyond the member's professional competence. b. A member must exercise duties prudently and professionally. c. A member must adequately plan and supervise the performance of professional services. d. A member firm must not advertise services to competing clients.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 52. Under common law, which standard may a client sue an auditor for failure to demonstrate due care? a. Negligence b. Gross Negligence c. Fraud d. All of the above.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-02 - LO: 04-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Applicable Law and Causes of Legal Action 53. A member of the AICPA must safeguard the confidentiality of client information. Which of the following is not a valid reason to disclose information to non-clients? a. To discuss information relating to inadequate disclosure in an audit report. b. To comply with a validly issued and enforceable subpoena or summons. c. To accommodate the review of client audit work papers under AICPA, PCAOB, or State Board of Accountancy authority. d. To explain to members of the press whether a client is likely to miss payroll in the forthcoming periods.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 54. Which of the following may an auditor use as a defense under the Securities Act of 1933? a. Contributory Negligence b. Scienter c. Due Care d. Immaterial loss ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-02 - LO: 04-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Applicable Laws and Causes of Legal Action 55. Compliance with GAAP was an unsuccessful defense in which of the following court cases? a. Credit Alliance v. Arthur Andersen & Co.. b. Ultramares Corp. v. Touche. c. Ernst and Ernst v. Hochfelder. d. Herzfeld v. Laventhol, Krekstein, Horwath & Horwath ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities LEARNING OBJECTIVES: AUDT.JOHN.16.04-03 - LO: 04-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Liability under Common Law and Contract Law 56. From whom should a CPA not accept a commission for recommending a product or service? a. A tax client. b. An audit client. c. A financial-planning client. d. A management-services client. e. Any of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 57. What is information about a client that cannot be subpoenaed by a court of law called? a. Confidential information. b. Privileged communication. c. Contingent information. d. Audit communication.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 58. An auditor who is professionally skeptical will do which of the following? a. Critically question contradictory audit evidence..\ b. Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high. c. Reasonably question the authenticity of documentation, while accepting that documents are to be considered genuine unless there is reason to believe the contrary. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking FrameworkProfessional Skepticism

59. Which term best describes a situation in which an individual is morally or ethically required to do something that conflicts with his or her immediate self-interest? a. An ethical dilemma. b. An ethical problem. c. An ethical theory. d. None of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Decision-Making Framework 60. Which of the following would be the first form filed with the SEC describing a major change in corporate governance? a. 8-K b. 8-Q c. 10-K d. 10-Q ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-03 - LO: 04-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Liability under Statutory Law 61. Which of the following concepts represents the most expansive aspect of liability for auditors? a. Third-Party Beneficiary. b. Identified User. c. Foreseen Party. d. Foreseeable Party.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-03 - LO: 04-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditor Liability under Common Law and Contract Law Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities 62. In which of the following situations would a CPA be considered independent? a. A CPA has obtained an auto loan from a banking client. b. A CPA has obtained a 90-day signature loan from a client. c. A CPA has obtained a loan for investment purposes from a client. d. A CPA has obtained an interest-free loan from a banking client.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 63. In which of the following situations would a CPA be considered independent? a. A CPA’s brother is the Vice-President of Sales at the CPA’s audit client. b. A CPA’s father was a salesman at the CPA’s audit client and now a major portion of the father’s pension fund is invested in the audit client. c. A CPA’s cousin works as a web-site designer at the audit client. d. A CPA’s son works summers at the audit client and has earned 10 shares of stock in the audit client.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 64. Which of the following represents a situation in which auditors may disclose client information to outside parties? a. Bringing working papers to a professional CPA workshop as an example of quality work. b. Complying with a validly issued and enforceable subpoena or summons. c. Showing the client’s bank statement to a neighbor who is a shareholder to emphasize its cash position. d. Explaining to the local television news station why the client is likely to miss payroll in the forthcoming periods.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities 65. Which of following is not part of the ethical framework derived from utilitarianism and rights theories? a. Identification of the legal issues. b. Determination of affected parties and their rights. c. Determination of the most important rights. d. Development of alternative courses of action.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Framework 66. What is the purpose of an ethical framework? a. To provide a defined methodology to solve the ethical problem. b. To provide a defined methodology to aid the user in making complex ethical decisions. c. To provide a defined program to solve ethical dilemmas. d. To provide all of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Framework 67. The auditor is normally not permitted to divulge confidential information obtained from a client. Which of the following situations would be a violation of this standard? a. To respond to the information request of a shareholder. b. To respond to a quality review request of the state board of accountancy. c. To initiate a complaint with the AICPA’s ethics division. d. To ensure adequate disclosure in accordance with GAAP. ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 68. Under the AICPA definition, who among the following would not be considered a covered member? a. An individual on the attest engagement team. b. An individual in a position to influence the attest engagement. c. A partner in the office of the lead engagement partner. d. All would be considered covered members.

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 69. Rule 201 - General Standards, of the AICPA Code of Professional Conduct does not include which of the following factors? a. Due professional care. b. Integrity and objectivity. c. Planning and supervision. d. Sufficient relevant data.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 70. Independence is required for which of the following types of services? a. Audit work. b. Tax work. c. Consulting. d. Independence is always required of the CPA. ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 71. According to the Sarbanes-Oxley Act, which of the following services may an auditor perform without impairing their independence? a. Actuarial services. b. Appraisal services. c. Internal audit services. d. Tax Services ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 72. Independence in mental attitude is required of auditor on all audit engagements. Which statement best describes the highest goal for independence? a. To comply with the AICPA Professional Code of Conduct. b. To be independent in fact and appearance. c. To be an advocate for shareholders. d. To be in compliance with SEC regulations.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 73. According to the framework for ethical decision making, which of the following should the decision maker consider? a. All possible alternative courses of action. b. The consequences associated with possible actions. c. Whether the rights framework would cause any course of action to be added. d. All of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 74. Under Rule 201, what best describes how an AIPCA member should act? a. With professional competence. b. With due professional care. c. After adequate planning and with appropriate supervision. d. All of the above ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities TOPICS:

AICPA Code of Professional Conduct

75. Commissions and referral fees are not permitted for which types of services? a. Tax. b. Reviews. c. Audits. d. Both B and C. ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 76. Among immediate family members, whose ownership of client’s stock is not considered the same as the covered member’s ownership? a. Spouse. b. 14 year-old daughter living at home. c. 19 year-old son away at college. d. Grandfather.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-06 - LO: 04-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 77. Which is the best definition of scienter? a. Fraudulent conduct in the purchase of a security. b. A causal connection between a misstatement and a material loss. c. A material omission of facts. d. A wrongful state of mind when making a misrepresentation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-02 - LO: 04-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Applicable Laws and Causes of Legal Action 78. What does utilitarian theory hold?

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities a. There is a decision that exists that is optimal for all people. b. What is ethical is the action that achieves the least bad for the greatest number of people. c. What is ethical is the action that achieves the greatest good for the greatest number of people. d. What is ethical is the action that achieves the greatest good for all people.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Ethical Framework 79. Which of the following is a cause of action against the auditor for breach of contract? a. Violating client confidentiality. b. Providing the audit report on time. c. Failing to discover an immaterial error or employee fraud. d. Withdrawing from an audit engagement with justification.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 80. Which of following is not an action required by Utilitarian Theory? a. Identify the potential problem. b. Identify the potential impact of actions on each affected party. c. Identify the rights of the affected parties. d. Identify the desirability of each action.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.04-05 - LO: 04-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: A Framework for Ethical Decision Making 81. The importance of independence Why is "independence" referred to as the cornerstone of auditing?

ANSWER: 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 Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities must be judged by all to be unbiased and free from favoritism for any party.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 82. Understanding contingent fees A. Define the term "contingent fee."

B. Explain the circumstances under which a CPA may and may not accept a contingent fee.

ANSWER: A contingent fee is defined as a fee established for the performance of any A. service in which no fee will be charged unless a specified finding or result is obtained and any fee charged would depend upon the results.

Contingent fees are prohibited for any client in which the auditor performs B. attestation services. The acceptance of a contingent fee would destroy the public confidence in the profession when performing attest services.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 83. Non-audit services prohibited or permitted under Sarbanes-Oxley Harry Rawlins CPAs, are engaged by DK, Inc., a public company to perform the year-end audit.

Discuss the types of services that Harry Rawlins CPAs will not be able to A. perform for DK under the Sarbanes-Oxley Act of 2002.

Under what circumstances may Harry Rawlins CPAs perform certain non-audit B. services for DK, Inc. under Sarbanes-Oxley Act of 2002?

ANSWER: The Sarbanes-Oxley Act of 2002 amended the Securities and Exchange Act of A. 1934 prohibiting an auditor from performing any of the following services for a public audit client: Bookkeeping or other services related to the accounting records or financial statements of the audit client, Financial information systems design and implementation, Appraisal or valuation services, fairness opinions, or contribution-in-kind reports, Actuarial services, Internal audit outsourcing services, Management functions or human resources, Broker or dealer, investment adviser, or investment banking services, and Legal services and expert services unrelated to the audit.

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities Tax preparation and other tax related services may be performed for DK by Harry Rawlins, CPA only if the services are approved by the audit committee B. and the board of directors. Harry Rawlins may also be engaged to perform audits on DK's internal controls and other attestation engagements.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Independence Rules of the SEC and the PCAOB 84. AICPA Code of Professional Conduct, Rule 101 Livingston and Associates is a audit firm in Las Vegas, Nevada and it performs the financial statement audit for Smith Plastics, Inc. For each non-related situation below, determine if each individual represented is independent of Smith Plastics and if Livingston and Associates (the Firm) is independent of Smith Plastics: Sam Livingston, an audit partner, meets Jill Warner, CFO of Smith Plastics after the engagement begins and they fall in love. Sam and Jill marry in Lake Tahoe, A. California a short time later. Sam Livingston will not be on the audit engagement team of Smith Plastics.

The Firm hires Billy Messer as a staff auditor. Billy is aware that his father has a B. material investment in Smith Plastics. Billy will not work on the Smith Plastics audit.

Lucy Brown is an audit manager at the Firm. Bob, her high school aged son, owns 1% of the equity of Smith Plastics. The investment is not material to Bob or Lucy's C. net worth. Lucy is assigned as the audit manager for the Smith Plastics engagement.

D. Smith Plastics has paid all but $5,000 of the previous years audit fees.

Julie Simpson, tax partner at the Firm has a 401k plan with multiple securities making up the balance. One of the securities in the plan is that of Smith Plastics E. which comprises .05% of the total balance of Julie's 401k. Julie does not have a significant portion of her retirement or savings in this particular plan.

ANSWER: Sam's newly found family relationship with a person of significant influence over Smith Plastics will impair his independence. Sam is a partner in the office A. of the firm performing audit services and he is considered a covered member.

As a covered member who is not independent of Smith Plastics, the Firm would not be independent of Smith Plastics.

Because Billy's immediate family member has a material investment and he is aware of this fact, he is not independent of Smith Plastics. Billy is not on the B. Smith Plastics engagement, therefore, he is not a covered member and the firm is independent.

Lucy has a direct financial interest in Smith Plastics. It is considered direct even though it is in the name of her dependant, Bob. As an audit manager of C. the Smith Plastics engagement, Lucy is a covered member and her ownership will impair the Firm's independence as well.

Because Smith Plastics has an outstanding balance due to the Firm from D. previous audit engagements, there is a essentially a debtor-creditor relationship Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities between client and auditor. The previous year’s audit fees must be paid or this relationship impairs Firm independence of Smith Plastics.

The component of Julie's 401k that is represented by shares of Smith Plastics is small. The investment in Smith Plastics by the 401k is considered an indirect interest to Julie. Additionally, the 401k is not material to her net worth. As an E. immaterial, indirect financial interest, the investment does not impair Julie's independence of Smith Plastics. Julie's status as a covered member is somewhat unclear. However, as Julie is independent it becomes irrelevant. The Firm will also be independent of Smith Plastics.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 85. Keeping client information confidential The rule on confidentiality is intended to protect the client's information. The rule, however, does not apply in certain circumstances.

A. Explain the rule on confidentiality.

B. Identify the circumstances in which the rule of confidentiality does not apply.

ANSWER: The rule on confidentiality exists to ensure a free flow and sharing of A) information between the client and the auditor. The client must be assured that the auditor will not communicate confidential information to outside parties.

B)

The rule shall not be construed (1) to relieve members of their professional obligations to make disclosures required by GAAP, (2) to affect members' obligation to comply with subpoenas or summonses, (3) to prohibit review of a member's professional practice under AICPA or state CPA society authorization, or (4) to preclude members from initiating a complaint or responding to any inquiry made by a recognized investigative or regulatory body.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 86. Expectations Gap What is the expectations gap?

ANSWER: Some investors mistakenly view the unqualified audit report as an insurance policy against any and all losses from a risky investment. When they do suffer losses, these investors believe that they should be able to recover their losses from the auditor. This misperception has elements of an “expectations gap ” whereby Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities shareholders believe that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements. This misperception, coupled with joint and several liability, class action lawsuits, and contingent fee compensation for lawyers, encourages large lawsuits against auditors, even for cases in which the auditor is only partially at fault or is not at fault.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication United States - BUSPROG: Ethics STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: AICPA Code of Professional Conduct 87. Independence Discuss what audit independence is and why it is important to the audit firm and the profession. What are some major threats to audit firm independence and what are some of the steps that audit firms and the profession have taken in addressing those threats?

ANSWER: There are two types of audit independence, i.e., independence in fact and independence in appearance. Independence in fact deals with the mental state that the auditor brings to the engagement. Auditors should be objective and unbiased in their judgments and exercise sufficient professional skepticism. Independence in appearance deals with their relationships with clients. Auditors should avoid those relationships with clients that would give the appearance of a lack of independence.

Both independence in appearance and in fact are important to the audit firm and the profession since the only value that an audit adds to the client is to enhance the credibility of their financial statements. Without independence the audit can add no value for the client. Independence is the cornerstone of the audit profession because it is the basis upon which the usefulness of the audit function is based.

Some major threats to the audit firm’s independence include: Compensation schemes of partners.

Understanding who the client is.

Over familiarity with the client.

Time pressures in performing the audit.

Ability to rationalize actions.

Providing Non-audit Services.

Some ways in which the audit profession and audit firms have dealt with these threats include: Establishing and monitoring codes of conduct.

Balancing compensation schemes.

Implementing high-level reviews of decisions to accept or retain clients.

Separating consulting activities from audit activities.

Performing within-firm reviews of audit work and audit documentation.

Performing reviews and inspections within the profession.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication Cengage Learning Testing, Powered by Cognero

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Chapter 4 - Professional Liability, auditor Judgment Frameworks, and Professional Responsibilities STATE STANDARDS: TOPICS:

United States - BUSPROG: Ethics United States - AK - AICPA BB-Critical thinking Major Threats to Independence

88. Professional Skepticism Explain why professional skepticism is important in making professional judgments. What are the types of actions that a professionally skeptical auditor will take?

ANSWER: Professional skepticism is important because without it auditors are susceptible to accepting weak or inaccurate audit evidence. By exercising adequate professional skepticism, auditors are less likely to overlook unusual circumstances, to over generalize from limited audit evidence, or to use inappropriate assumptions in determining the nature, timing, and extent of audit procedures. An auditor who is professionally skeptical will do the following: • Critically question contradictory audit evidence • Carefully evaluate the reliability of audit evidence, especially in situations in which fraud risk is high and/or only a single piece of evidence exists to support a material financial accounting transaction or amount • Reasonably question the authenticity of documentation, while accepting that documents are to be considered genuine unless there is reason to believe the contrary • Reasonably question the honesty and integrity of management, individuals charged with governance, and third party providers of audit evidence.

• Be sure to collect sufficient evidence so that judgments are not made in haste or without adequate support.

• When evidence is contradictory, be particularly diligent in evaluating the reliability of the individuals or processes that provided that evidence.

• Generate independent ideas about reasons for unexpected trends or financial ratios rather than simply relying on management’s explanations.

POINTS: 1

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process 1. The auditing standards issued by the PCAOB are identical to the auditing standards issued by the AICPA. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 2. The standards of the PCAOB consist of seven principles. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 3. The PCAOB’s general standards provide guidance to audit firms in selecting and training their professionals. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 4. The PCAOB’s second fieldwork standard requires auditors develop an understanding of the client’s controls as an important prerequisite to developing specific audit tests. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 5. The AICPA’s fundamental principles can be divided into four sections: purpose of the audit, responsibility of the auditor, performance of the audit, and reporting of the results. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 6. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 7. An audit must be performed by persons who can make sound judgments relating to complex accounting issues. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 8. The auditor needs to obtain absolute assurance as to whether the financial statements are free from material misstatement. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 9. The Clarity Project is an initiative of the PCAOB to clarify the links between the standards of the PCAOB and the AICPA. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-01 - LO: 05-01 Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional Audit Standards 10. The ten standards of auditing, adopted by the PCAOB encompass three broad categories including: general standards, fieldwork standards and reporting standards. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 11. The common purpose of audit standards created by the various authorities is to provide reasonable assurance that audits are conducted in a quality manner. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-01 - LO: 05-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional Audit Standards 12. The AICPA principles governing an audit explicitly state that an audit has inherent limitations prohibiting an auditor from obtaining reasonable assurance that the statements are free from misstatement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-01 - LO: 05-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional Auditing Standards 13. If controls are effective, there is a higher likelihood that the financial statements are free of material misstatement. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process LEARNING OBJECTIVES: AUDT.JOHN.16.05-03 - LO: 05-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Phases of the Audit Opinion Formulation Process 14. The reporting standards of the ten generally accepted audit standards of the PCAOB includes consistency, disclosure, and due professional care. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 15. Within each cycle, the audit is designed around the specific audit procedures required by the PCAOB general standards. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-05 - LO: 05-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Financial Statement Assertions 16. Comparability is one of the five management assertions. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-05 - LO: 05-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Financial Statement Assertions 17. The PCAOB requires the audit be conducted with due professional care, which is a standard of care that would be expected of a reasonably prudent auditor. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 18. An auditor should give equal emphasis to all management assertions when testing accounts. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-05 - LO: 05-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Financial Statement Assertions 19. The nature of an audit procedure indicates when the procedure is performed during the audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-06 - LO: 05-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Evidence and Procedures 20. An auditor typically indicates in the engagement letter that the audit will result in an unqualified report on the financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-08 - LO: 05-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase I Making Client Acceptance and Continuation Decisions 21. Evidence is required to be sufficient and appropriate in order to provide a reasonable basis for audit conclusions. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Generally Accepted Auditing Standards and IAASB Principles

22. U.S. auditing standards recommend that a successor auditor on an initial audit obtain client permission to communicate with the predecessor auditor. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-08 - LO: 05-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase I Making Client Acceptance and Continuation Decisions 23. Developing an understanding of the client's business and industry is essential to proficiency as discussed in the PCAOB’s general standards. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 24. Test of controls are a type of substantive procedure. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 25. The Public Company Accounting Oversight Board (PCAOB) does not set specific standards for audits of public companies. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process 26. Recalculation involves independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 27. Scanning is a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 28. Audit procedures can be classified as risk assessment procedures, test of controls or substantive tests. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 29. Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 30. The first stage in an audit is performing a risk assessment. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 31. Physically examining a client’s assets is an audit procedure. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 32. Audit documentation is frequently called working papers. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 33. Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 34. Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be immaterial, either individually or when aggregated with other misstatements, before consideration of any related controls. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 35. There is an inverse relationship between the assessment of risk of material misstatement in an account and the amount of evidence required. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-09 - LO: 05-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase III Performing Risk Assessment 36. The purpose of the audit program is to list the audit procedures to be followed in gathering audit evidence and to help those in charge of the audit to monitor the progress and supervise the work. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 37. The effectiveness of entity-wide controls may reduce the extent of testing of transaction controls. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-10 - LO: 05-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase III Obtaining Evidence about Internal Control Operating Effectiveness 38. When assessing the effectiveness of controls for relevant assertions the auditor tests only transaction controls. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-10 - LO: 05-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase IV Obtaining Evidence about Internal Control Operating Effectiveness 39. The auditor is not required to test every control related to relevant assertions in a significant account. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-10 - LO: 05-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase III Obtaining Evidence about Internal Control Operating Effectiveness 40. For an integrated audit, the auditor’s opinion about internal control effectiveness is based on control effectiveness at year-end as opposed to throughout the year. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-10 - LO: 05-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase III Obtaining Evidence about Internal Control Operating Effectiveness 41. Research indicates that weaknesses in control components other than control activities do not cause fraud and other misstatements in financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-10 - LO: 05-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase III Obtaining Evidence about Internal Control Operating Effectiveness 42. Assertions are relevant to the audit process because they are the representations of management embodied in the financial statements. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 43. 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 44. The PCAOB does not currently have a mandate for convergence with other auditing standards. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 45. Substantive analytical procedures are optional for significant tests and disclosures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-11 - LO: 05-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase IV Obtaining Substantive Evidence 46. In performing substantive tests on account balances, the auditor performs tests for all five assertions. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-11 - LO: 05-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Phase IV Obtaining Substantive Evidence

47. If the auditor assesses internal controls to be effective, less substantive testing is likely. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-11 - LO: 05-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase IV Obtaining Substantive Evidence 48. If the auditor’s assessment is that there is high risk due to the subjectivity of the accounting process, substantive procedures should be more rigorous. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-11 - LO: 05-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase IV Obtaining Substantive Evidence 49. An Integrated Audit requires the issuance of separate reports for the opinions expressed on the financial statements and on internal control.. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-12 - LO: 05-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Completing the Audit and Making Reporting Decisions 50. In an integrated audit, the auditor issues an opinion on both the financial statements and internal control. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-12 - LO: 05-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Phase V Completing the Audit and Making Reporting Decisions

51. The first general standard of the PCAOB requires that an audit be performed by which type of person? a. An auditor with seasoned judgment in varying degrees of supervision and review. b. An auditor with appropriate technical training and proficiency. c. An auditor with adequate knowledge of the standards of field work and reporting. d. An auditor satisfying the independence standards.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 52. Which auditing standards apply to private companies? a. The AICPA Standards. b. The IASSB Standards. c. The Standards of the PCAOB. d. All of the above.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 53. The AICPA Principles Governing an Audit include which of the following categories that guide the conduct of an audit? a. Purpose of an audit and premise upon which an audit is conducted. b. Responsibilities. c. Performance. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-01 - LO: 05-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Professional Auditing Standards 54. What is the scope of applicability of the auditing standards of the AICPA? a. Nonpublic companies traded in non-U.S. markets. b. Nonpublic companies in the U.S. c. Public companies traded in non-U.S. markets.

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process d. Public companies traded in the U.S. ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 55. To satisfy the fieldwork standards, what must an auditor do? a. Act with due care. b. Gather sufficient appropriate evidence. c. Be independent in mental attitude. d. Have adequate knowledge about the client’s industry. e. All of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 56. Which one of the following organizations provides auditing standards for public companies? a. GAO. b. AICPA. c. GAAP. d. PCAOB. ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 57. Which one of the following has the most affect on the reliability of financial statements? a. The size of the client b. The industry of the client c. The client’s internal control structure. d. The client’s trend of earnings.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-03 - LO: 05-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: An Overview of the Phases in the Audit Opinion Formulation Process Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process 58. The standards of competence, independence, and due professional care are covered by which section of the generally accepted auditing standards? a. General standards. b. Standards of fieldwork. c. Reporting standards. d. None of the above.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 59. What are the PCAOB standards that present guidance in testing assertions and planning for the audit are known as? a. General standards. b. Fieldwork standards. c. Reporting standards. d. None of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 60. Which of the following is the primary assertion related to testing inventory on hand to see if it includes consignment goods ? a. Existence b. Completeness c. Valuation d. Rights and Obligations ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-05 - LO: 05-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Financial Statement Assertions 61. Which assertion is most closely related to the determination of the adequacy of the allowance for doubtful accounts? a. Existence b. Valuation c. Rights and Obligations Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process d. Presentation and Disclosure ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-05 - LO: 05-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Financial Statement Assertions 62. Which assertion addresses whether all transactions and accounts that should be included in the financial statements are included? a. Existence. b. Valuation. c. Completeness. d. Rights and Obligations ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 63. Which assertion addresses whether the financial statements items are properly classified in the financial statements? a. Completeness. b. Existence. c. Valuation. d. Presentation and Disclosure.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 64. Which of the following groups are committed to the convergence of the auditing standards? a. IAASB. b. PCAOB. c. AICPA. d. Both A and C. e. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Generally Accepted Auditing Standards and IAASB Principles

65. Which of the following is a procedure that requests a direct written response to the auditor form a third party? a. Inquiry b. Confirmation c. Inspection d. Observation ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-06 - LO: 05-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Evidence and Audit Procedures 66. Which of the following is a procedure which analyzes plausible relationships among financial and nonfinancial data? a. Analytical procedures. b. Scanning. c. Reviewing. d. Observation.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-06 - LO: 05-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Evidence and Audit Procedures 67. What does the quality of the evidence an auditor collects depend upon? a. The nature of the procedures. b. The extent of the procedures. c. The timing of the procedures. d. Both A and C. e. All of the above.

ANSWER: e POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 68. Which of the following terms describes procedures designed to detect material misstatements in accounts ?

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process a. Substantive procedures. b. Control Tests c. Risk assessment procedures d. Business risk procedures.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-06 - LO: 05-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Evidence and Audit Procedures 69. The proper supervision of audit assistants is a requirement found in which section of the Generally Accepted Auditing Standards? a. General Standards. b. Standards of Fieldwork. c. Standards of Reporting. d. Standards of Quality Control.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 70. Which one of the following is a requirement pf the reporting standards included in the generally accepted auditing standards? a. The auditor will state explicitly whether the financial statements are fairly presented in accordance with the applicable financial reporting framework. b. The auditor will identify in the auditor’s report, those circumstances in which auditing principles have not been consistently observed in the current period in comparison to the preceding period. c. The auditor will review adjusting journal entries for accuracy, and if the auditor concludes those entries are not reasonable accurate, the auditor must so state in the auditor’s report. d. The auditor will express an unqualified opinion on the financial statements, or will conduct additional audit procedures until such an opinion can be expressed.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 71. Which of the following statements about the auditing standards issued by the AICPA is true? a. The auditing standards issued by the AICPA are no longer recognized by the PCAOB. b. The auditing standards issued by the AICPA are no longer recognized by the profession because the Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process AICPA voted itself out of existence. c. The auditing standards issued by the AICPA continue to be issued by that organization for audits of public companies. d. The auditing standards issued by the AICPA were used by the PCAOB as a starting point.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 72. Which of the following is a reason why an auditor needs an understanding of internal controls? a. To provide individual comments on internal control non-compliance. b. To become comfortable that the client will pay its audit bills. c. To assess materiality. d. To assess the risk of possible misstatements in the financial statements.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 73. Which of the following is not a reason why an auditor obtains an understanding of internal controls? a. Understanding the entity's internal control is a requirement of GAAS. b. The auditor must use the information to assess the risk of material misstatements arising from the lack of internal control. c. It is the primary basis for the audit report. d. It assists the auditor in designing the nature, timing and extent of further audit procedures.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 74. Which type of audit documentation is required by PCAOB standards? a. Flowcharts b. Narratives c. Questionnaires d. A specific form of documentation is not required.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-07 - LO: 05-07 Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Documentation 75. Which of the following is not a typical accounting cycle? a. Revenue. b. Inventory. c. Cash. d. Internal Controls.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 76. Which of the following statements about assertions is true? a. All assertions are equally important for all accounts. b. The importance of an assertion depends upon the account. c. Assertions are not related to accounts. d. None of the above.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 77. Which of the following assertions would the auditor usually consider most relevant for accounts payable? a. Existence. b. Valuation. c. Disclosure. d. Completeness.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 78. Which of the following is a use of audit documentation? a. Assisting the engagement team in planning and performing the audit. b. Assisting members of the engagement team responsible for supervising and reviewing the audit work. c. Retaining a record of matters of continuing significance to future audits of the same organization.

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 79. Which of the following factors influence the risk of material misstatement? a. The business risks. b. Management incentives. c. IT risks. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 80. What does business risk include? a. Economic factors. b. Competitive factors. c. Regulatory risk. d. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 81. At what level does the auditor assess the risk of material misstatement? a. The financial statement level. b. The company level. c. The assertion level. d. Both A and C. e. All of the above.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process 82. What does the effectiveness of internal controls influence? a. Inherent risk. b. Control risk. c. Risk of material misstatement. d. Both B and C. ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 83. Which of the following is not a control that the PCAOB has identified that auditors should consider in evaluating whether or not an organization has sufficiently addressed fraud risk? a. Controls over significant, unusual transaction. b. Controls over related-party transactions. c. Controls related to marketable securities. d. Controls related to significant management estimates.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-09 - LO: 05-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase II Performing Risk Assessment 84. Which statement is true concerning materiality? a. Misstatements are material if they could reasonably be expected to influence the decisions of users of the financial statements. b. Materiality guidelines are specifically prescribed by the PCAOB. c. Materiality is not a useful concept in assessing internal control effectiveness. d. Materiality is a concept applied to financial statement presentation but not to disclosures.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-09 - LO: 05-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase II Performing Risk Assessment 85. Which document is used by auditors to formally accept a new client? a. Management representation letter. b. Audit Report. c. Engagement Letter. d. Audit Contract.

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 86. Which of the following items is not included in the engagement letter? a. The responsibilities of the auditor. b. The responsibilities of management. c. The objective of the financial statements. d. Identification of the applicable financial reporting framework for the preparation of the financial statements.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 87. With a substantive audit strategy, what is an auditor likely to do? a. Extensively tests internal controls. b. Limit the testing of internal controls. c. Not assess control risks. d. Issue an adverse opinion on the financial statements.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 88. Which of the following is not a question an auditor considers in deciding whether to pursue a lower control risk approach prior to substantive testing? a. Is the design of the control effective? b. Does the control promote operational efficiency? c. Is it cost effective to test controls? d. Are controls operating effectively?

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-10 - LO: 05-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase III Obtaining Evidence about Internal Control Effectiveness Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process 89. Which of the following would not affect an auditor's judgment concerning internal controls? a. The assertion being tested. b. The design of the control. c. The operation of the control. d. The level of inherent risk.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 90. With a dual purpose test, what is an auditor likely to do? a. Perform a substantive procedure concurrently with a test of a control. b. Perform a substantive procedure concurrently with a risk assessment test. c. Perform a risk assessment test concurrently with a test of a control. d. None of the above.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 91. Which statement is correct? a. Assertions affected by highly objective estimates usually require direct tests of balances. b. The materiality of the account totally dictates the substantive procedures to be performed. c. The evidence the auditor obtains from risk assessment procedures does not influence the substantive procedures to be performed. d. The extent and results of control tests performed by the auditor will influence the substantive procedures to be performed.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-11 - LO: 05-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase IV Obtaining Substantive Evidence about Accounts 92. Which of the following factors affect the substantive procedures performed in an audit? a. The subjectivity of accounting process. b. Size of the account. c. Effectiveness of the relevant controls. d. All of the above affect the substantive procedure that are performed.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 93. If the auditor’s assessment of the materiality of the account balance is high, what would be the respective effect on the extent of substantive testing and the nature of procedures performed?

Extent of Tests Nature of Procedures a. Less More rigorous b. Less Less rigorous. c. More Less rigorous d. More More rigorous ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-11 - LO: 05-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase IV Obtaining Substantive Evidence about Accounts 94. An auditor gathers evidence on internal controls for which respective time periods for the purposes of expressing an opinion on control effectiveness and for testing controls in the financial statement period?

Control Effectiveness Financial Statement a. As of year end As of year end b. As of year end Throughout the year c. Throughout the year As of year end d. Throughout the year Throughout the year ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-13 - LO: 05-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Example: Assessing Control Design Effectiveness 95. Which of the following would not be a factor in whether a control weakness would be considered to be a material weakness as opposed to a significant deficiency? a. The materiality of the related balance. b. The volume of transactions affected. c. The subjectivity of the account balance. d. The nature of the client’s industry.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-13 - LO: 05-13 Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Example: Assessing Control Effectiveness 96. Which of the following statements is correct concerning the auditor’s opinion on internal control effectiveness? a. The report describes any material weaknesses and discusses actions taken by management to remediate the problems. b. The report does not discuss whether the control weaknesses were first identified by management or the auditor. c. The report does not recognize the integrated nature of the audit and the affect of the material weakness on the planning of the financial statement audit. d. The report identifies management’s actions to remedy the prior year’s control weaknesses.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.05-12 - LO: 05-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Phase V Completing the Audit and Making Reporting Decisions 97. The auditing standards Under the clarified auditing standards, what is the structure of each auditing standard issued by the ASB? What is the purpose of each section?

ANSWER: Introduction explains the purpose and scope of the standard.

Objective defines the context in which the requirements are set.

Definitions include, where relevant, specific meanings of terms in the standards.

Requirements identify what the auditor is required to do to achieve the objective of the standard. Requirements are expressed using the words “the auditor should ” or “the auditor must.”

Application and Other Explanatory Material include cross-references to the requirements and provide further guidance for applying the requirements of the standard POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 98. What are the AICPA’s fundamental principles?

ANSWER: In place of the ten historical standards that governed the auditing profession, as part of the clarity project the AICPA developed seven fundamental principles that govern audits. The four categories, with their specific principles, are: Purpose of an Audit and Premise upon Which an Audit Is Conducted 1. The purpose of an audit is to enhance the degree of confidence that users can Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process place in the financial statement. This purpose is achieved when an auditor expresses an opinion on the financial statements.

2. An audit is based on the premise that management has responsibility to prepare the financial statements, maintain internal control over financial reporting, and provide the auditor with relevant information and access to personnel.

Responsibilities 3. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit.

Performance 4. The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement.

5. Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality levels, identify risks of material misstatement, and design and implement appropriate audit responses to the assessed risks.

6. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement.

Reporting 7. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be expressed.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 99. Audit phases Identify at least five steps involved in an audit.

ANSWER: Phase I Making Client Acceptance and Continuance Decisions Phase II Performing Risk Assessment Phase III Obtaining Evidence about Internal Control Operating Effectiveness Obtaining Substantive Evidence about Accounts, Disclosures, and Phase IV Assertions Phase V Completing the Audit and Making Reporting Decisions POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Overview of the Audit Process: A Standards-Based Approach 100. PCAOB Assertions Discuss the five management financial statement assertions identified in the PCAOB Standards. Provide examples.

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process ANSWER:

Existence or Occurrence: Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred.

Example: Management asserts that sales recorded in the income statement represent transactions in which the exchange of goods or services with customers for cash or other consideration had occurred.

Completeness: Assertions about completeness address whether all transactions and accounts that should be included in the financial statements are included.

Example: Management asserts that notes payable in the balance sheet include all such obligations of the organization.

Valuation or Allocation: Assertions about valuation or allocation address whether accounts have been included in the financial statements at appropriate amounts.

Example: Management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value.

Rights and Obligations: Assertions about rights address whether assets are the rights of the organization, while assertions about obligations address whether liabilities are the obligations of the organization.

Example: Management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property and that the corresponding lease liability represents an obligation of the entity.

Presentation and Disclosure: Assertions about presentation and disclosure address whether components of the financial statements are properly classified, described, and disclosed.

Example: Management asserts that obligations classified as long-term liabilities in the balance sheet will not mature within one year

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Describe the Assertions Contained in Financial Statements 101. Write the three general auditing standards of the PCAOB. ANSWER: The general audit standards are: Technical Training and proficiency: The examination is to be performed 1. by a person or persons having adequate technical training and proficiency as an auditor.

Independence: An independence is mental attitude is to be maintained 2. by the auditor or auditors.

Due Professional Care: Due professional care is to be exercised in the 3. performance of the examination and the preparation of the report.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 102. Explain the meaning of due professional care.

ANSWER: Due professional care refers to the skill and care of a professional expected in an audit. Following Generally Accepted Auditing Standards (GAAS) is one benchmark for due professional care. However, following GAAS is not always Cengage Learning Testing, Powered by Cognero

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process sufficient. If a reasonably prudent person would have done more, the professional should do at least as much. Due professional care is also determined by evaluating whether someone with similar skills in a similar situation would have performed the same way as the auditor.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Generally Accepted Auditing Standards and IAASB Principles 103. What are the three broad types of audit procedures? What is the purpose of each test?

Risk assessment procedures. Procedures performed by the auditor to obtain information ANSWER: for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion, but are used for purposes of planning the audit.

Tests of controls. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level.

Substantive procedures. Audit procedures designed to detect material misstatements in accounts which include tests of details and substantive analytical procedures.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures 104. There are nine specific actions an auditor can undertake to collect evidence. Identify each action and provide an example.

Types of Audit Procedure (examples in italics) ANSWER: Inspection of documentation Examining a client document for evidence of authorization Inspection of assets Physically examining a client’s equipment Observation Looking at a process or procedure, such as observing the client use of a restricted access area External confirmation Obtaining a direct written response to the auditor from a third party, such the client’s customers, confirming the amount owed to the client Recalculation Checking the mathematical accuracy of a document or record, such as an inventory count sheet Reperformance Independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation Analytical procedures Analyzing plausible relationships among both financial and non-financial data Scanning Performing a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance

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Chapter 5 - Professional Auditing Standards and the Audit Opinion Formulation Process Inquiry Seeking information of persons within or outside of the client organization, such as communicating with the CFO or general counsel about changes in accounting policy

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Procedures

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Chapter 6 - A Framework for Audit Evidence 1. Audit evidence used to support an audit opinion is obtained soley from audit procedures. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-01 - LO: 06-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Sufficient Appropriate Audit Evidence 2. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.100 - Identify the Basic Sources of Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 3. The auditor uses professional judgment to determine which audit procedures to perform. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.100 - Identify the Basic Sources of Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 4. Audit evidence consists of both information that corroborates management’s assertions and information that contradicts such assertions. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-01 - LO: 06-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Sufficient Appropriate Audit Evidence 5. The reliability of audit evidence relates to the connection between the audit procedure being performed and Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence the assertion being audited. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-02 - LO: 06-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence 6. The type of audit evidence known as inquiry does not ordinarily provide sufficient audit evidence of the absence of a material misstatement, nor is it alone sufficient to test the operating effectiveness of controls. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 7. A limitation of observation is that observing a process on one day does not necessarily indicate how the transactions were processed on a different day or over a relevant period of time. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 8. Relevance and reliability of evidence make up the appropriateness of audit evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 9. Evidence can be directly or indirectly relevant to an assertion. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 10. Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 11. Internal documentation is generally less reliable than external documentation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-02 - LO: 06-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence 12. Confirmation statements from banks are an example of third-party external documents. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-02 - LO: 06-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence 13. Inspection of tangible assets generally provides reliable evidence with the respect to the completeness of the assets, but not necessarily about the existence of the assets. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 14. Vouching recorded transactions involves taking a sample entry from a journal and obtaining the original source documents to ensure the transaction occurred. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-02 - LO: 06-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Appropriateness of Audit Evidence 15. Tracing is a process that helps establish that recorded transactions are valid. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-02 - LO: 06-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Appropriate Audit Evidence 16. One strategy used by auditors in testing assertions is to perform directional testing to find overstatements or understatements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.103 - Explain Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 17. The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.103 - Explain Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.103 - Explain Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 19. For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.103 - Explain Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 20. Ulanda and Mudana, CPAs are performing an audit on McArnee, Inc. 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.103 - Explain Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.103 - Explain Directional Testing Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

22. While inspecting documents, auditors should use original documents rather than copies, because copies are easy for management to falsify. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 23. Auditors should mail third party confirmations through the client's mailroom. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 24. Inspection of an asset generally provides reliable evidence about the rights and obligations assertion related to that asset. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-03 - LO: 06-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Type and Timing of Audit Procedures 25. Audit documentation serves as support for the financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence 26. The greatest risk of recording transactions in the incorrect period occurs during the roll-forward period. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests 27. The primary importance of the audit program is its guidance of the overall conduct of the audit. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 28. Inquiries of client personnel are not a frequent means of evidence gathering by an auditor. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 29. The purpose of performing analytical procedures in the planning stage of an audit is to gather audit evidence and make conclusions about account balances. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-03 - LO: 06-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Type and Timing of Audit Procedures 30. An example of physical observation is the auditor's testing of inventory by counting it to substantiate the existence assertion. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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 recalculation by footing. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 32. Some audit procedures may be performed prior to the end of the year under audit. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 33. The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.106 - Nature and Purposes of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 34. The auditor utilizes the same audit program and the same procedures each year for each client in order to ensure that nothing is missed in the current year audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.106 - Nature and Purposes of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence 35. In a reasonableness test, the auditor develops an expected value of an account by using data wholly or partly independent of the client’s accounting information system. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 36. Audit planning workpapers 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 37. An outside specialist may assist the auditor in obtaining sufficient, appropriate evidence concerning the analysis of complex tax compliance issues. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-07 - LO: 06-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using a Specialist to Assist with Obtaining Evidence 38. Audit documentation should generally be retained for at least seven years. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 39. Audit documentation should include the initials or electronic signature in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.

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Chapter 6 - A Framework for Audit Evidence a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 40. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 41. The client’s verbal evidence is more reliable than evidence from independent outside sources. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 42. Underlying accounting records consist of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 43. The relevance of audit evidence depends on the audit assertion being tested. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 44. Analytical procedures are a type of substantive evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 45. While inspecting documents, the reliability depends on the nature and source of the documentation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 46. The auditor’s job is to gather sufficient appropriate audit evidence on which to base an opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 47. Appropriateness deals with the quantity of evidence the auditor collects, whereas sufficiency deals with the quality of evidence the auditor collects. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 48. Audit findings represent a summary of incorrect transactions detected during the audit. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.06-09 - LO: 06-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Documenting Audti Evidence 49. Liabilities and expenses are most often tested for overstatements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.101 - Audit Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 50. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.rview - Overview STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 51. Appropriateness of evidence is a measure of which of the following? a. Quantity of evidence. b. Quality of evidence. c. Sufficiency of evidence. d. Meaning of evidence.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 52. Two determinants of the persuasiveness of evidence include which of the following?

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Chapter 6 - A Framework for Audit Evidence a. Competence and Sufficiency. b. Relevance and Reliability. c. Appropriateness and Sufficiency. d. Independence and Effectiveness.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence 53. Directional testing involves testing transactions or balances primarily for which type of error? a. Overstatement. b. Understatement. c. Either overstatement or understatement. d. Either overstatement nor understatement.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.107 - Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 54. Which one of the following would be considered the most reliable type of audit evidence? a. Purchase orders from vendors. b. Customer accounts receivable files. c. Computerized general ledger. d. Confirmations from banks.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 55. Which one of the following would be the most reliable type of evidence? a. Photocopies. b. Indirectly obtained evidence. c. Observation of assets. d. Inquiry with the in-house attorney.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 56. Which one of the following would be the least reliable type of evidence?

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Chapter 6 - A Framework for Audit 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. Evidence from an easily overridden information system.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 57. An example of an external document would include which of the following? a. Vendor invoices. b. Customer orders. c. Confirmation replies from customers. d. All the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.108 - External Document 58. Which of the following is an example of inspection of documentation? a. Review shipping documents. b. Estimate the expected amount of interest income. c. Observe controls. d. Recalculate the total amount include on a sales invoice.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests 59. The process of vouching helps establish which of the following regarding recorded transactions? a. Transactions have been recorded. b. Transactions are complete. c. Transactions are valid. d. Transactions are presented properly.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 60. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence? a. Reprocessing. b. Recalculation.

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Chapter 6 - A Framework for Audit Evidence c. Vouching. d. Examination of documentation.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 61. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests which of the following assertions? a. Occurrence. b. Rights. c. Existence. d. Completeness.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 62. Sufficient evidence gathered by the auditor involves which of the following? a. The quantity of evidence to be obtained. b. The type of evidence to be obtained. c. Obtaining limited evidence to achieve efficiency. d. The use of an audit program to obtain evidence.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 63. An audit program provides an effective means for which of the following? a. Reviewing the completeness and persuasiveness of procedures performed. b. Recording the audit work performed and those responsible for performing the work. c. Organizing and distributing the work. d. All the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence 64. The reliability of a client's internal documentation is most affected by which of the following? 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 generally accepted audit standards.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 65. External documentation may lack reliability. Which of the following is the most probable reason for that? a. The external party may be competent in 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 66. 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. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 67. An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following? a. Directional testing for existence. b. Directional testing for completeness. c. Direct testing for valuation. d. Direct testing for rights.

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Chapter 6 - A Framework for Audit Evidence ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.107 - Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 68. 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.107 - Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 69. Which of the following assertions is the primary assertion that is satisfied by physically observing the client's count of inventory? a. Rights. b. Valuation. c. Completeness. d. Existence.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.109 - Basic Audit Procedures and the Assertion(s) each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 70. When the auditor used the audit procedure vouching she is primarily concerned with which of the following assertions? a. Completeness. b. Existence. c. Authorization. d. Classification.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.109 - Basic Audit Procedures and the Assertion(s) each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 71. Observation suffers from which of the following limitations? a. Observation of processing is rarely unobtrusive.

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Chapter 6 - A Framework for Audit Evidence b. Observation of processing on one day does not necessarily indicate how transactions were processed on a different day. c. All the above. d. None of the above.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.109 - Basic Audit Procedures and the Assertion(s) each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 72. The extent of procedures is affected mostly by which of the following factors? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.109 - Basic Audit Procedures and the Assertion(s) each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 73. An audit program is created to specify which of the following? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.106 - Nature and Purposes of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 74. Which one of the following is the primary reason for documenting audit work? a. To prevent litigation by other parties that 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence 75. To be considered reliable evidence, confirmations must be controlled by which of the following individuals? a. A client employee responsible for accounts receivable. b. An external auditor. c. A client’s internal audit department. d. A client’s controller or CFO. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 76. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 77. 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 and signature of the client representative that the auditor interacted with while performing testing. d. Authenticated identification of the person responsible for completing the procedure and conclusions.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 78. The processes used by management in developing estimates include which of the following? a. Controls over the process. b. The reliability of underlying data in developing the estimate. c. Use of outside experts by management (for example, how they were used and their expertise). d. All of the above.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence LEARNING OBJECTIVES: AUDT.JOHN.16.110 - Uniqueness of Procedures for Testing Management's Estimates STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 79. Which of the following is the primary source for evidence to corroborate the existence of pending litigation? a. Vendor confirmations. b. Disclosures in financial statements. c. Management representation letters. d. Attorney confirmations.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 80. 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 do which of the following? a. Decrease. b. Increase. c. Remain the same. d. Become more difficult to ascertain.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 81. What is determined to be appropriate and sufficient will be affected by which of the following? a. The client’s risk of material misstatement. b. The risk of material weakness in internal controls. c. Either a or b. d. None of the above.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 82. Audit documentation should contain which of the following? a. A heading that includes the name of the audit client, an explanatory title, and the balance sheet date. b. The initials or electronic signature of the auditor performing the audit test and the date the test was completed.

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Chapter 6 - A Framework for Audit Evidence c. The initials or electronic signature of the manager or partner who reviewed the documentation and the date the review was completed. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.111 - Audit documentation STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 83. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.110 - Uniqueness of Procedures for Testing Management's Estimates STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 84. Which of the following is not a type of internal documentation? a. Legal documents. b. Business documents. c. Third-party documents. d. Accounting documents.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.109 - Basic Audit Procedures and the Assertion(s) each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 85. Which of the following is a factor that the auditor should consider as they affect the reliability and relevance of information produced by a management’s specialist? a. Competence, capabilities, and objectivity of that specialist. b. Work performed by that specialist. c. Appropriateness of that specialist’s work as audit evidence for the relevant assertion. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence United States - AK - AICPA BB-Critical thinking 86. When using confirmations with outside parties, the auditor must assure which of the following about the outside party? a. The outside party exists. b. The outside party is able to respond objectively and independently. c. The outside party is unbiased in responding. d. All the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 87. Each of the audit procedures that an auditor could select possesses which of the following characteristics?: a. Audit procedures take time, effort, and money. b. Audit procedures are difficult to perform. c. Audit procedures require multiple people from the firm to perform. d. All of the above.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.112 - Cost of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 88. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.113 - Persuasiveness of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 89. Which of the following types of audit evidence is the least reliable? a. Evidence from the client’s organization. b. Evidence derived from a well-controlled system. c. Evidence from independent outside sources. d. Original documents.

ANSWER: a Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.113 - Persuasiveness of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 90. In evaluating cost of evidence, which of the following evidence qualities of the audit usually has the lowest cost? a. High quality. b. Medium quality. c. Low quality. d. All cost the same.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.112 - Cost of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 91. 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.114 - Types of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 92. Vouching of transactions deals with which of the following? a. Testing forward. b. Testing backward. c. Testing at a point in time. d. Directional testing either forward or backward.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.114 - Types of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 93. Reprocessing of transactions involves which of the following? a. Testing forward. b. Testing backward.

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Chapter 6 - A Framework for Audit Evidence c. Testing at a point in time. d. Directional testing either forward or backward.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.114 - Types of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 94. 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 assessment of whether the test indicates the possibility of material misstatement in an account. c. A cross-reference. d. All are included in good audit documentation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.111 - Audit documentation STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 95. A date at which audit evidence is collected earlier than the balance sheet date is referred to as what? a. Subsequent date. b. Cutoff period. c. Significant date. d. Interim date.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 96. The auditor normally considers both underlying accounting data and corroborating information in the audit process. Underlying accounting data does not include which of the following items? a. Evidence of controls. b. Minutes of meetings. c. Checks, invoices, and contracts. d. General and subsidiary ledger.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.114 - Types of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence 97. The written record that forms the basis for the auditor’s conclusions is referred to as what? a. Audit documentation. b. Audit adjustment. c. Accounting records. d. Footing.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.106 - Nature and Purposes of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 98. Why is the appropriateness of audit evidence obtained by the auditor important in forming an audit opinion?

Describe the qualities information should have to be considered appropriate by the auditor.

ANSWER: Appropriateness is a measure of the quality of evidence. Audit evidence that is considered appropriate contains the characteristics of relevance and reliability.

Relevant evidence refers to the assertion being tested. Reliability refers to the relative truthfulness of the assertion.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 99. 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.

ANSWER: 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.

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Chapter 6 - A Framework for Audit Evidence 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.107 - Directional Testing STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 100. 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.

ANSWER: 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. manual or electronic tick marks and a legend indicating the nature of the ∙ work performed by the auditor.

A section that identifies all significant issues that arose during the audit ∙ and how they were resolved ∙ 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 101. Reliability of audit evidence The Auditing Standards Board established guidelines to assist auditors in evaluating the reliability of audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for each.

ANSWER: Evidence that is considered to be more reliable includes: Directly observable evidence such as counting inventory or observing ∙ fixed assets.

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Chapter 6 - A Framework for Audit Evidence 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking ∙

102. Sufficient appropriate evidential matter Discuss the importance of the phrase "sufficient appropriate evidence is to be obtained..."

How do auditing standards define sufficiency and appropriateness?

ANSWER: Audit standards states that auditors must obtain sufficient appropriate evidence by performing various audit procedures in order to support the audit opinion regarding the financial statements under audit.

The AICPA’s AU-C 500 defines sufficiency as “the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such evidence.” The AICPA’s AU-C 500 defines appropriateness as “the measure of the quality of audit evidence (that is, its relevance and reliability in providing support for the conclusions on which the auditor’s opinion is based)”.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.102 - Appropriateness and Sufficiency of Evidence STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 103. Audit assertions and procedures on Cash balances Identify and demonstrate the audit assertions and different approaches to the obtaining audit evidence for an audit of cash balances in a financial statement audit.

ANSWER: In the performance of the audit of cash the auditor is most concerned the existence, valuation, and rights assertions. The audit of cash may use the following approaches: 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 Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence 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 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 104. Distinguish between internal documentation and external documentation as types of audit evidence. Give two examples of each. Which type is considered more reliable?

ANSWER: Internal documentation involves the auditor’s examination of documents that have been prepared and used within the client’s organization and are retained without ever going to an outside party. Examples would include duplicate sales invoices, employees’ time reports, and inventory receiving reports.

External documentation involves the auditor’s examination of documents that have been in the hands of someone outside the client’s organization. Examples include vendors’ invoices, cancelled checks, cancelled notes payable, and insurance policies.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.104 - Audit Procedures and the Assertion(s) Each Tests STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 105. Audit program Discuss the purpose of the audit program and its importance to the auditor.

ANSWER: 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. ∙ recording the audit work performed. ∙ reviewing the completeness and persuasiveness of procedures Cengage Learning Testing, Powered by Cognero

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Chapter 6 - A Framework for Audit Evidence performed.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.106 - Nature and Purposes of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 106. 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.

ANSWER: Auditing standards require that the auditor obtains sufficient appropriate evidence before issuing an opinion, and requires auditors to document (and retain such documentation for at least seven years) that evidence and judgments based upon it.

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

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

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

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

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

6. Results of analytical procedures and audit testing.

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

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.105 - Purposes and Contents of Audit Programs STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 107. Audit procedures 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

How used

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Assertion(s) tested

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Chapter 6 - A Framework for Audit Evidence Analytical Procedures ANSWER:

Procedure

How used Assertion(s) tested Observe taking of inventory of Observation Existence assets Inspect existence and condition of Physical examination Existence, Valuation assets.

Inquire of management of assets Existence, Inquiry not recorded or that have been Completeness sold or discarded.

Existence, Valuation, Confirm details of purchase with Confirmation Presentation and seller of asset.

Disclosure, Rights Examination of Examine supporting Existence, Valuation, documents documentation.

Rights Recomputation Recompute depreciation Valuation Reprocess a sample of purchase Reprocessing Existence transactions Vouching a sample of recorded Existence, Valuation, Vouching assets Rights Valuation, Analytical Analysis depreciation Completeness Procedures expense POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.115 - Audit procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 108. 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

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Audit procedure(s)

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Chapter 6 - A Framework for Audit Evidence

ANSWER:

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

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.115 - Audit procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 1. Materiality relates to the significance or importance of an item. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 2. Auditors and management should agree on what is considered material. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 3. Clearly trivial and not material are terms that can be used interchangeably. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 4. Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 5. As detection risk increases, the amount of evidence an auditor needs to obtain decreases. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 6. When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 7. Only public companies have to be concerned with business risk. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 8. Touring a company’s plant offers much insight into potential audit issues. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 9. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain information related to client management’s integrity. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement United States - AK - AICPA BB-Critical thinking 10. News media and web searches can provide useful information related to client management’s integrity and the risk of material misstatement in the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 11. LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 12. The purpose of the auditor‘s consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 13. Trend analysis deals with the relationship between two or more accounts within the current-year. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 14. One potential limitation to using industry data in preliminary analytical procedures is that the data from the client may not be directly comparable to the data of the industry.

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 15. Brainstorming sessions should be led by the engagement team. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 16. During the process of a brainstorming session, the focus is more on the quality of ideas generated rather than the quantity of ideas generated. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-05 - LO: 07-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Analytical Procedures and Brainstorming Activities 17. The usual length of a brainstorming session is about four hours. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 18. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 19. Detection risk is measured on a scale of 0% to 5%. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 20. A risk of material misstatement of 100% indicates that material misstatement is highly likely. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 21. The internal controls of an organization have no impact on the efficiency of an audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-06 - LO: 07-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Planning Audit Procedures to Respond to Assessed Risks of Material Misstatement 22. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement United States - AK - AICPA BB-Critical thinking 23. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Factors Affecting Inherent Risk 24. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 25. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-06 - LO: 07-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Identified Risks of Material Misstatement 26. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement United States - AK - AICPA BB-Critical thinking 27. Audit procedures have to be announced or be completed at predictable times. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 28. All audit procedures must be completed before year end. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 29. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 30. Inherent and control risks are risk controlled by the auditor. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 31. A risk factor indicating a heightened risk of fraud would be considered a significant risk. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 32. The existence of one or more risk factors means that there is a material misstatement present. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 33. In most audits, materiality is most commonly expressed as a percentage of net income. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality 34. Auditors are only concerned with materiality for the financial statements as a whole. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 35. Tolerable misstatement is always less than or equal to performance materiality. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 36. An immaterial misstatement is defined as one that is clearly inconsequential, whether taken individually or in the aggregate and whether judged by any criteria of circumstance. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality 37. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 38. Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 39. The lower the dollar amount of the performance materiality the more audit evidence is required. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 40. A significant risk is the same as a material risk. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement 41. If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 42. The purpose of tests of controls are to provide reasonable assurance that internal controls are operating effectively. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 43. The quick ratio is useful for analyzing inventory accounts. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 44. Detection risk is controllable by the client. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 45. Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 46. Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2? a. “amount of a misstatement or omission” b. “in light of surrounding circumstances” c. “probable that the judgement of a reasonable person” d. “significantly altered the total mix of information available” ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Materiality 47. If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet, the auditor should set overall materiality at which of the following dollar amounts? a. $20,000 b. $25,000 Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement c. $40,000 d. $15,000 ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 48. Which of the following best describes the amount of misstatement an auditor is willing to accept and still judge that an account balance is not materially misstated? a. Tolerable misstatement. b. Performance materiality. c. A clearly trivial amount. d. Significant risk.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 49. If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial material setting? a. They need to be reassessed. b. They need to be noted in the footnotes. c. No action is required. d. None of the above.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 50. Which item is correct concerning the risk of material misstatement? a. Risk of material misstatement arises because audit procedures have been misapplied. b. Risk of material misstatement can be controlled and changed by the auditor. c. Risk of material misstatement must be assessed in non-quantitative terms. d. Risk of material misstatement is controllable by the client.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement 51. What is the nature of the relationship between risk of material misstatement and audit risk? a. Direct. b. None. c. Correlational. d. Inverse.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 52. Detection risk is affected by which aspects of substantive audit procedures? a. Nature. b. Timing. c. Extent. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 53. Which of the following factors would lead an auditor to assess inherent risk at a higher level? a. The account balance is easily determined without estimation. b. The account balance is composed of a high volume of nonroutine transactions. c. The account balance is composed of simple transactions. d. All of the above would lead the auditor to assess a higher level of inherent risk.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assess Factors Affecting Inherent Risk 54. To learn more about a company and its inherent risks, auditors can use which of the following resources?

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement a. Management inquiries. b. Economic statistics. c. Online searches. d. Any of the above could be used.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 55. Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor? a. Data is under court order. b. They must always respond. c. The client does not approve of confidential information being shared. d. Both A and C are correct.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 56. Which of the following factors will result in control risk being assessed at a higher level? a. Controls are well designed. b. There is a lack of supervision of accounting personnel. c. Accounting staff are well trained and educated. d. The control environment is operating effectively.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 57. Which of the following are two frequently used preliminary analytical procedures? a. Reasonableness tests and economic analyses. b. Trend analyses and reasonableness tests. c. Ratio analyses and economic analyses. d. Ratio analyses and trend analyses.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 58. Which of the following best describes year-to-year comparisons of account balances? a. Time analyses. b. Reasonableness tests. c. Ratio analyses. d. Trend analyses.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 59. Which of the following ratios provide information about liquidity? a. Net profit margin. b. Current ratio. c. Inventory turnover. d. Sales to assets.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 60. Which of the following would be a reason that industry and client data were not directly comparable? a. Broad industry. b. Use of different accounting principles. c. Neither of the above. d. Both A & B are correct.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 61. Which of the following are common brainstorming session guidelines? a. Freedom of expression. b. Respectful communication. c. Suspension of criticism. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

62. What is the main reason to establish guidelines for brainstorming sessions? a. To not hurt feelings. b. It is required by the SEC. c. To encourage interactive and constructive group dialogue and idea exchange. d. To pass information up to top-level management efficiently.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 63. What type of relationship exists between audit risk and detection risk? a. Direct. b. Inverse. c. Indirect. d. No relationship.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 64. What is the typical range for the setting of audit risk? a. 1% - 10% b. 1% - 5% c. 0% - 5% d. 0% - 10% ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 65. Which of the following would be the likely risk results from using a 1% level of detection risk? a. High detection risk and low audit risk. b. High detection risk and high audit risk. c. Low detection risk and high audit risk. d. Low detection risk and low audit risk.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 66. What is the typical range for the assessment of the risk of material misstatement? a. 0% - 100% b. 0% - 10% c. 0% - 5% d. 1% - 100% ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 67. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work? a. Increases. b. Decreases. c. Stays the same. d. Becomes less reliable.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 68. Which of the following statements best describes what is meant by setting control risk at100%? a. Controls are effective. b. Controls are relevant. c. Controls are ineffective. d. Cannot be determined from the information given.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 69. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor? a. Increase in direct testing.

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement b. Decrease in direct testing c. No change in direct testing. d. Direct testing is not needed.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 70. Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk? a. Audit risk model. b. Risk of misstatement model. c. Significance model. d. Materiality equation.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 71. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective, which of the following tests are eliminated? a. Substantive testing. b. Tests of controls. c. Tests of details of balances. d. Substantive analytical procedures.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 72. Which of the following terms best describes the types and appropriateness of audit procedures used? a. Nature of detection risk. b. Material misstatement risk. c. Nature of auditing procedures. d. Nature of risk response.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 73. Appropriateness addresses which aspect of audit procedures? a. Relevance. b. Reasoning. c. Reliability. d. Both A & C. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 74. Which of the following best describes what is meant by the timing of risk response? a. Where procedures are conducted. b. When procedures are conducted. c. How procedures are conducted. d. Who conducts the procedures.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 75. What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year? a. Introduce unpredictability. b. Confuse the client. c. Gather information during different times of the year. d. Finish the audit sooner.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 76. Which of the following approaches can be used to introduce unpredictability into the audit?

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement a. Assessing high risk accounts. b. Performing procedures on an unannounced basis. c. Performing the audit in the same location each year. d. Selecting items that would normally be tested.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 77. What procedure has to be completed at or after the end of the period? a. Assessment of control risk. b. Engagement letter. c. Evaluation of adjusting journal entries. d. All procedures must be completed prior to period end.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 78. An increase in the risk of material misstatement would lead to which of the following responses? a. Increase in the extent of auditing procedures. b. Decrease in the extent of auditing procedures. c. No change in the extent of auditing procedures. d. No change in the extent of audit procedures.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 79. Which of the following risk factors suggests a heightened level of risk of material misstatement? a. Having a stable product. b. The departure of key personnel of a company. c. Few immaterial related-party transactions. d. Declining a merger with another company.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 80. Which of the following terms best describes the risk that audit procedures will fail to detect misstatements exceeding tolerable misstatement? a. Audit risk. b. Control risk. c. Detection risk. d. Inherent risk.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identifying and Assessing Risks of Material Misstatement 81. As the risk of material misstatement increases, what happens with detection risk? a. Medium increase. b. Stay the same. c. Decrease. d. Severely increase.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 82. In which of the following situations will auditors typically rely on internal controls over financial reporting? a. If control risk is assessed at a high level. b. If the controls are determined to be designed and operating effectively. c. If the clients asks the auditor to test controls. d. If the controls are sufficient to increase control risk to an acceptable level.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-04 - LO: 07-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assess Factors Affecting Control Risk Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 83. The risk of material misstatement refers to which of the following? a. Inherent risk. b. Control risk and acceptable audit risk. c. The combination of inherent risk and control risk. d. Inherent risk and audit risk.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 84. Which of the following statements is false? a. Inherent risk is inversely related to the level of control risk. b. Inherent risk is directly related to the amount of evidence required in account testing. c. Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls. d. Inherent risk and control risk are assessed by the auditor and controlled by the client.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Factors Affecting Inherent Risk 85. Which of the following is a factor that would cause an increase in the assessment of control risk? a. New products have uncertain likelihood of success b. Little interaction between senior management and operating staff c. A new business strategy is improperly implemented. d. The industry is mature and declining.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.07-04 - LO: 07-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Factors Affecting Control Risk 86. Qualitative reasons for materiality List the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative reasons.

ANSWER: The SEC provides guidance when a quantitatively small misstatement may still be Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement considered material due to qualitative reasons. These reasons include: ∙ The misstatement hides a failure to meet analysts’ consensus expectations for the company. ∙ The misstatement changes a loss into income, or vice versa. ∙ The misstatement concerns a segment or other portion of the company’s business that plays a significant role in the company’s operations or profitability. ∙ The misstatement affects the company’s compliance with regulatory requirements. ∙ The misstatement affects the company’s compliance with loan covenants or other contractual requirements. ∙ The misstatement has the effect of increasing management’s compensation. ∙ The misstatement involves the concealment of an unlawful transaction.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 87. Inherent risk List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level.

ANSWER: Factors that would lead an auditor to assess inherent risk relating to operations at a higher level include: ∙ The company lacks personnel or expertise to deal with the changes in the industry. ∙ New products and service offerings have uncertain likelihood of successful introduction and acceptance by the market. ∙ The use of information technology is incompatible across systems and processes. ∙ Expansion of the business for which the demand for the company’s products or services has not been accurately estimated. ∙ A new business strategy is incompletely or improperly implemented. ∙ Financing is lost due to the company’s inability to meet financing requirements. ∙ New regulatory requirements increase legal exposure. ∙ Alternative products, services, competitors, or providers pose a threat to current business. ∙ There are significant supply chain risks. ∙ The production and delivery processes are complex. ∙ The industry is mature and declining. ∙ The organization lacks ability to control costs with the possibility of unforeseen costs. ∙ The organization produces products that have multiple substitutes.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 88. Brainstorming What are the steps of the brainstorming process?

The steps of the brainstorming process are: ANSWER:

1. Review prior year client information.

2. Consider client information, particularly with respect to the fraud triangle.

3. Integrate information from steps 1 and 2 into an assessment of the likelihood of fraud in the engagement.

Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement 4. Identify audit responses to fraud risks.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 89. Risk Responses When considering risk responses, what steps should the auditor take?

An auditor should do the following when considering risk responses: ANSWER:

1. Evaluate the reasons for the assessed risk of material misstatement.

2. Estimate the likelihood of material misstatement due to the inherent risks of the client.

3. Consider the role of internal controls, and determine whether control risk is relatively high or low, thereby determining whether the auditor should rely on controls (thereby necessitating tests of controls) or whether the auditor needs to conduct a more substantive audit.

4. Obtain more relevant and reliable audit evidence as the auditor’s assessment of the risk of material misstatement increases.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 90. Importance of materiality judgments Explain the differences between performance materiality and tolerable misstatement.

ANSWER: Performance materiality refers to the amount or amounts set by the auditor at less than the materiality level for the financial statements as a whole or for particular classes of transactions, account balances, or disclosures. If the auditor plans the audit only to detect individual material misstatements, the auditor would be overlooking the fact that the aggregate of individually immaterial misstatements can cause the financial statements as a whole to be materially misstated.

Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. If performance materiality is set too high, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. If performance materiality is set too low, the auditor might perform more substantive procedures than necessary.

Performance materiality is different from, but relates to, the concept of tolerable misstatement.

Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated. Tolerable misstatement is the application of performance materiality to a particular sampling procedure, so it is always less than or equal to Cengage Learning Testing, Powered by Cognero

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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement performance materiality.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality Judgments STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 91. Relationships between risks Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will affect planned audit evidence.

Audit risk, ∙ Inherent risk, ∙ Control risk, ∙ Detection risk, ∙ Tolerable misstatement ANSWER:

An increase in audit risk decreases planned evidence.

An increase in inherent risk increases planned evidence.

An increase in control risk increases planned evidence.

An increase in detection risk decreases planned evidence.

An increase in tolerable misstatement decreases planned evidence.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 92. Predecessor auditor Discuss the required communications between predecessor and successor auditors.

ANSWER: Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited.

The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the initiation of communication rests with the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements that related to confidentiality, the predecessor must obtain the former client’s permission prior to providing information.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.123 - Objectives of Audit Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.123 - Objectives of Audit Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 3. When performing substantive tests using sampling methods, the auditor's main concern is the risk of incorrect rejection. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.124 - Risks Associated with Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.124 - Risks Associated with Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 5. The tolerable misstatement is the confidence level needed to infer population values. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 6. Statistical sampling is used when an auditor chooses to examine all purchases of equipment exceeding $1,000.00 and to test the remaining items by analytical procedures. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 7. The most efficient method of testing a large population is the use of non-statistical sampling. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 8. Statistical sampling assists auditors in determining the sufficiency of evidence gathered. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 9. When testing controls, the use of haphazard selection of a sample allows for random, statistical evaluation. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software 10. The tolerable failure rate is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances.. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 11. The expected population deviation rate is the auditor's best estimate of the percentage of transactions processed for which a control is not effectively applied. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 12. An attribute is defined as a characteristic of the population of interest to the auditor. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 13. The sample size decreases as the risk of over-reliance decreases. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 14. For tests of controls, the most commonly used statistical method is attribute sampling. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 15. Increasing the expected failure rate will cause the sample size to increase. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 16. Sample size varies directly with sampling risk. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 17. Statistical sampling used in control testing eliminates the need for evaluation of errors from a qualitative perspective. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-04 - LO: 08-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attribute Sampling 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software United States - AK - AICPA BB-Critical thinking 19. The individual auditable elements defined by the auditor are the sampling units. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.123 - Objectives of Audit Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 20. The most common statistical approaches for substantive testing are classical variables sampling and MUS. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 21. Non-statistical samples should be based on the same audit considerations as those used for statistical sampling. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 22. Random sampling can be used even if the auditor does not plan on using statistical sampling. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-03 - LO: 08-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical and Statistical Sampling 23. Either nonstatistical or statistical sampling is appropriate for substantive tests of details. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-03 - LO: 08-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Nonstatistical and Statistical Sampling 24. Monetary unit sampling (MUS) sampling is designed to test whether there is an acceptable risk of account balance understatement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 25. Monetary unit sampling (MUS) results in an efficient sample size and concentrates on the dollar value of the account balances. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 26. Sample size in a MUS sample is a function of risk of incorrect acceptance, tolerable misstatement, and expected misstatement. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 27. The population for MUS is defined as the number of dollars in the population being tested. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 28. Sampling risk is defined as the risk that an inference drawn from a sample will be incorrect. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.124 - Risks Associated with Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 29. Projected misstatements are developed by extrapolation from the misstatements in sample items to the population. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 30. When evaluating an MUS sample, if the auditor finds no misstatements in the sample, the misstatement projection is zero dollars, and the total estimated misstatement will equal the projected misstatement for items in lower-stratum. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 31. Population items with zero balances have no chance of being selected using PPS sampling. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS 32. Population items with a zero balance have the same chance of being chosen as those with dollar balances Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software when using MUS sampling. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 33. Evaluating statistical sample results is one of the tasks that can be performed by GAS. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.129 - Using GAS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 34. The population is a group of items in an account balance that the auditor wants to test. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.123 - Objectives of Audit Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 35. Tolerable misstatement is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 36. Extracting data from the client’s computer system is one of the tasks that can be performed by GAS. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.129 - Using GAS Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

37. Statistical sampling combines the theory of probability and statistical inference with audit judgment and experience. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 38. An example of attribute testing involves obtaining evidence that the client has matched the vendor invoice details with a purchase order and receiving report before payment approval. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 39. A sample which exceeds the tolerable rate of deviation results in the auditor’s reliance on internal control effectiveness. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-04 - LO: 08-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling 40. Attribute sampling for testing controls should only be done by the auditor at the end of the fiscal period under audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software United States - AK - AICPA BB-Critical thinking 41. In analysis of the results of an attribute sampling plan, an auditor may determine that the sample size must be increased. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 42. Random number, systematic sampling and material value sampling are acceptable sample selection methods for statistical sampling. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.130 - Sample Selection Method STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 43. Random number, haphazard selection and block sampling are acceptable sample selection methods for nonstatistical sampling. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 44. By using Generalized Audit Software (GAS), the auditor can potentially audit the whole population rather than taking a sample. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.131 - GAS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 45. Using attribute sampling the auditor can test for multiple attributes using the same source documents.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 46. The audit objective of attribute sampling is to test the correctness of an account balance. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 47. Stratification of the population into several homogeneous subpopulations generally creates audit efficiency. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.123 - Objectives of Audit Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 48. In attribute sampling if the upper limit of the possible deviation rate exceeds the tolerable rate the auditor can rely upon the control as being effective. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 49. In MUS sampling basic precision is the upper misstatement limit when no misstatements are detected in a MUS sample. It is computed by multiplying the sampling interval by the error expansion factor. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

50. In attribute sampling if the selected item cannot be located, the auditor should assume that the control procedure was not followed and assess that item as a failure. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 51. Which of the following is not considered when obtaining audit evidence through sampling? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.123 - Objectives of Audit Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 52. For which of the following audit procedure would sampling be most appropriate? a. Inquiry b. Observation c. Confirmation d. Analytics ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-01 - LO: 08-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Overview of Sampling and GAS 53. Which one of the following is not a decision the auditor makes when using attribute sampling? a. Sample size. b. Selection of items included in the sample. c. Evaluation of sample information. d. Whether to document all phases.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 54. Which one of the following is a decision the auditor makes when using attribute sampling? a. The sampling unit. b. Period covered by testing. c. Completeness of the population. d. All of the above are auditor decisions.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 55. Which of the following is not considered to be non-sampling risk? a. Misinterpretation of information. b. Use of improper audit procedure. c. The sample does not represent the population. d. Carelessness of the auditor.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-02 - LO: 08-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Objectives of Sampling and Risks Associated with Sampling 56. Which of the following describes sampling risk? 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. The auditor incorrectly applies sampling methodology. d. The sample size will be larger than needed.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-02 - LO: 08-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software TOPICS:

United States - AK - AICPA BB-Critical thinking Objectives of Sampling and Risks Associated with Sampling

57. Which of the following occurs when, based on sample results, control risk is assessed excessively high? a. Audit inefficiency. b. A less expensive audit. c. Reduction of substantive testing. d. Errors that are more likely to occur than anticipated.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 58. Concluding that the book value of inventory is correct when it is materially misstated is an example of which of the following risks? a. Incorrect rejection. b. Incorrect acceptance. c. Insufficient sample size. d. None of the above.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 59. Incorrect acceptance is directly related to which of the following? a. The efficiency of the audit. b. The ineffectiveness of the audit. c. The cost of the audit. d. All of the above.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 60. When performing sampling, 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.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 61. While auditors may use either statistical or non-statistical sampling, some auditors restrict the use of nonstatistical sampling for what reason? a. It is less effective. b. It is less objective. c. It is less efficient. d. It is less risky.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 62. Which of the following applications are incorporated into statistical sampling? a. Binomial and confidence intervals. b. Random and haphazard selection. c. Hypergeometric distribution with audit risk. d. Probability and statistical inference with audit judgment.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 63. Which one of the following issues need not be addressed when planning an audit sample to test control procedures? a. Audit objective of the test. b. Minimum failure rate. c. Expected population deviation rate. d. Auditor's allowable risk of assessing control risk too low.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 64. Which of the following is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software risk in performing tests of account balances? a. Tolerable failure rate. b. Allowable risk of assessing control risk too low. c. Expected failure rate. d. Allowance for sampling error.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 65. Which of the following statistical sampling methods is most commonly used to test control procedures? a. Variable sampling. b. Ratio estimation sampling. c. Attribute sampling. d. Dollar unit sampling.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 66. Which one of the following is not a typical step used to implement an attribute sampling plan? a. Define the attributes of interest and what constitutes failure(s). b. Select and test the sample items. c. Evaluate the sample results. d. Define the non-statistical sampling method that is most effective and efficient.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 67. When performing attribute sampling, which of the following varies directly with the sample size? a. The expected failure rate. b. The tolerable failure rate. c. The risk of overreliance. d. The nonsampling risk.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software United States - AK - AICPA BB-Critical thinking 68. In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements in what manners? a. Qualitatively and quantitatively. b. Absolutely and proportionately. c. Haphazardly and randomly. d. Methodically and systematically.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 69. In testing account balances, haphazard sampling is an acceptable method of sampling provided the auditor believes the sample to be which of the following? a. Statistically sound. b. Representative of the population. c. Representative of the sample. d. In the upper stratum.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 70. When determining sampling size in attribute sampling, which of the following is usually true? a. Sampling risk will be too high. b. Tolerable misstatement amount is determined. c. A failure rate is not to be expected. d. Population size is not a major factor.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-04 - LO: 08-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Attributes Sampling 71. Which of the following is not an item the auditor needs to determine in designing sampling for substantive testing? a. The audit objective. b. The method of selecting a sample.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software c. Expected misstatement conditions. d. Expected deviation rate.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-05 - LO: 08-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Using Sampling to Gather Evidence about Misstatements in Account Balances 72. Which of the following is a method of reducing non-sampling risk? a. Proper supervision and instruction of the client’s employees. b. Proper supervision and instruction of the audit team. c. The use of attributes sampling rather than variables sampling. d. Controls to ensure that the sample drawn is random and representative.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-02 - LO: 08-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Objectives of Sampling and Risks Associated with Sampling 73. Which of the following is a factor that the auditor should consider when choosing between non-statistical and statistical sampling? 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 a statistical measure of the risk of drawing a wrong conclusion. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 74. When confirming receivables in testing for overstatements, assume that there are few or no misstatements expected and the selection will be based on the dollar value of individual items. Which of the following is the auditor most likely to use? a. MUS sampling. b. Stratified mean-per-unit sampling. c. Ratio estimation sampling. d. Attribute sampling.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 75. The results of MUS sampling will be unacceptable when the total estimated misstatement exceeds which of the following? a. The tolerable error rate. b. The tolerable misstatement amount. c. The expected deviation rate. d. The expected deviation amount.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-06 - LO: 08-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling 76. MUS is based on which of following? a. Attributes estimation sampling. b. Classical variables sampling. c. Population variability sampling. d. Expected error sampling.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-06 - LO: 08-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling 77. MUS is designed to test for which of the following? a. Overstatements. b. Understatements. c. Neither understatements nor overstatements. d. Either understatements or overstatements.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software United States - AK - AICPA BB-Critical thinking 78. Which of the following does the design of a MUS sample not require the auditor to determine? a. Risk of incorrect acceptance. b. Inherent risk. c. Ratio of expected misstatement to tolerable misstatement. d. Ratio of tolerable misstatement to the total population value.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 79. When using MUS, an auditor found that the sampling interval should be $15,755. If selecting the sample manually, the auditor should round the sample interval to which of the following amounts? a. $16,000. b. $15,000. c. $14,000. d. $10,000.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 80. When planning a test of details using MUS sampling, tolerable misstatement is usually set at what level? a. Higher than performance materiality. b. Lower than performance materiality c. Higher than the expected error amount. d. Lower than the expected error amount.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-06 - LO: 08-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling 81. In MUS, what is meant by a sampling interval of 900? a. Every 900th item will be selected. b. Every 900th dollar will be selected. c. Expected misstatement is 900.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software d. Tolerable misstatement is 900.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-06 - LO: 08-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling 82. In using MUS, once the auditor has determined the sample size, which of the following is needed to determine the sampling interval? a. Expected misstatement. b. Tolerable misstatement. c. Population size. d. Mean.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-06 - LO: 08-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Monetary Unit Sampling 83. Which one of the following is a proper course of action for the auditor when the total estimated misstatement exceeds the tolerable misstatement? a. The auditor can ask the client to correct the known misstatements. b. The auditor will analyze the detected misstatements for some common problems. c. The auditor can expand the sample. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 84. MUS sampling has all of the following advantages over other statistical methods except which of the following? a. Easier to apply than other statistical sampling approaches. b. Sample sizes are relatively small. c. It is a relatively easy way to make sure that negative balances and zero balances are included in the sample. d. Usually results in a highly efficient sample size.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 85. Which of the following is a major disadvantage of MUS sampling? a. Sample selection is relatively easy. b. Sample sizes are relatively small. c. It is easy way to test for understatement. d. It directly controls for the risk of incorrect acceptance.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 86. That auditor will do which of the following when the results of sample testing conclude that there is misstatement in excess of the tolerable misstatement? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 87. Which of the following is not a type of statistical method that provides results in dollar terms? a. Variables sampling. b. Attributes sampling. c. Monetary unit sampling. d. Probability proportional to size sampling.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.132 - Objectives of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 88. When an auditor uses MUS and analyzes misstatements in the lower stratum, which of the following will be multiplied by the sampling interval to calculate the projected misstatement for each misstated item? a. Audit value.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software b. Tolerable misstatement. c. Sampling interval. d. Tainting percentage.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 89. In attribute sampling, which of the following does the risk of incorrect acceptance deal with? a. Effectiveness. b. Efficiency. c. Reliability. d. Both A and B. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 90. In attribute sampling, the risk of incorrect rejection deals with which of the following? a. Effectiveness. b. Efficiency. c. Reliability. d. Both A and B. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 91. Which of the following is a factor of nonsampling risk? a. Not carrying out the appropriate audit procedure. b. Having a sample which does not represent the population. c. Using a random sample selection d. Using non-statistical sampling ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.08-02 - LO: 08-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software TOPICS:

Objectives of Sampling and Risks Associated with Sampling

92. Attribute sampling is used in which of the following situations? 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. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 93. In selecting a sample for attribute testing, systematic selection involves which of the following approaches? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 94. In selecting a sample for attribute testing, haphazard selection involves which of the following approaches? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 95. In selecting a sample for attribute testing, block sampling involves which of the following approaches? 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.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 96. Sampling risk deals with which of the following? 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. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 97. Which of the following are limitations of using the MUS sampling method? a. MUS is not very useful in testing for understatement. b. MUS is not very useful in testing for zero and negative amounts. c. N MUS is not very useful in testing if the auditor expects numerous misstatements. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 98. In testing the reasonableness of an account balance, if MUS sampling cannot be used because of its limitations, what is an alternative statistical method? a. Attribute sampling. b. Classical variables sampling. c. Discovery sampling. d. All of the above.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 99. When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process using which of the following components? a. Basic Precision. b. Projected misstatement for items in lower-stratum. c. Incremental Allowance for Sampling Error.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 100. Which of the following task is not performed by generalized audit software? a. Footing a file. b. Obtaining file statistics. c. Checking for gaps in processing sequences. d. Preparing custom reports. e. All of the above tasks can be performed using GAS. ANSWER: e POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.129 - Using GAS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 101. Dividing the population into relatively homogeneous groups in order to reduce sample size is the definition of which of the following terms? a. Ratio estimation. b. Difference estimation. c. Stratification. d. MUS sampling.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.132 - Objectives of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 102. Sampling factors List the four important decisions an auditor must make when deciding to use sampling.

ANSWER: 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 selected for audit testing? ∙ Selection - Which items should be included in the sample?

Evaluation - What inferences can be made about the overall population ∙ from the sample?

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.132 - Objectives of Sampling Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking

103. Nonsampling risk What is nonsampling risk and how can it be eliminated?

ANSWER: 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 104. 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 Tolerable failure rate is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances Expected failure rate is an anticipation of the deviation rate in the entire population.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking ANSWER:

105. Planning and documentation of an attribute sampling plan What are the steps to implement an attribute sampling plan?

ANSWER: The auditor should include the following in his or her working papers for adequate documentation involving sampling: 1. Define the attributes of interest and what constitutes failure(s).

2. Define the population from which the sample is to be taken.

3. Determine the sample size.

4. Determine the method of selecting the sample.

5. Select the sample items and perform the test of control.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software 6. Evaluate the sample results and consider the effect on planned substantive procedures.

7. Document all phases of the sampling process.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.127 - Attribute Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 106. Evaluating misstatements when using sampling to test account balances Explain the term "misstatement" as it applies to sampling during substantive procedures and explain how the term may be interpreted differently by different auditors.

ANSWER: A misstatement is an error, either intentional or unintentional, that exists in a transaction or financial statement account balance. When sampling for substantive tests of details, a misstatement involves differences between recorded values and audited values.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 107. Choosing sampling methods Identify the factors that an auditor would consider when choosing between non-statistical sampling and statistical sampling.

ANSWER: When choosing between statistical and non-statistical 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.126 - Non-statistical vs. Statistical Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 108. Using MUS sampling Describe MUS sampling and identify the conditions that would cause an auditor choose to use MUS sampling.

ANSWER: MUS sampling is an adaptation of attribute sampling methods to dollar value testing. It was developed specifically for use in auditing. MUS sampling is most Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software effective when testing for overstatements in situations when few misstatements are expected. Individual book values must be available for testing. The population for MUS 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 109. Sampling and non-sampling risk Discuss what is meant by “sampling risk” and “nonsampling risk”.

ANSWER: Sampling risk occurs when the sample is not representative of the population; that is, the characteristics of interest in the sample are not the same as those in the population. Sampling risk is the risk that the auditor’s conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure were applied in the same way to the entire population.

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk is referred to as nonsampling risk. Nonsampling risk occurs when audit tests do not uncover existing exceptions in the sample. Nonsampling risk could also be due to a lack of knowledge of the auditor performing the audit procedure.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.pling - Risks of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 110. Application of MUS Explain why monetary unit sampling is not useful for detecting understatements ANSWER: Monetary unit sampling is a technique that assigns physical units to an item in the population based on the dollar value of the item. Larger dollar items are more likely to be chosen for the sample than smaller items. So, if a client has understated an item there is less likelihood that the item will be selected. Consequently, auditors do not commonly use MUS when they are concerned with understatements.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 111. Advantages of MUS sampling Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software Discuss the advantages of monetary unit sampling over other sampling methods. ∙ MUS is generally easier to apply than other statistical sampling approaches.

ANSWER:

∙ MUS automatically selects a sample in proportion to an item’s dollar amount, thus providing automatic stratification of the sample. ∙ If the auditor expects (and finds) no misstatements, MUS usually results in a highly efficient sample size.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 112. Upper Misstatement Limit When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process. Describe the four components that make up this total.

The total estimated misstatement is computed by adding together three components: ANSWER: Factual misstatement for items in the top-stratum.

Basic Precision - The amount of uncertainty associated with testing only a part of the population (sampling error). It is equal to the UML if no errors are found in the sample.

Most Likely Misstatement (MLM) - The best estimate of the actual amount of dollar misstatements that exist in the account balance. This is also called projected misstatement.

Incremental Allowance for Sampling Error - An increase in the upper misstatement estimate caused by the statistical properties of misstatements found.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.128 - MUS STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 113. 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.

Random number selection ANSWER:

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.

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.132 - Objectives of Sampling STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 114. Non-statistical sampling Describe non-statistical sampling for test of account balances and how it is used by the auditor.

ANSWER: Nonstatistical samples should be based on the same audit considerations as those used for statistical sampling. There is no way to mathematically control for and measure sampling risk in a nonstatistical sample; the auditor can project only the detected misstatements and make a judgment as to whether the account is likely to be materially misstated, and then decide whether more audit work is needed.

In determining sample size, all significant items should be tested. The auditor should select all items over a specific dollar amount, and then, depending on audit objectives, select items with other characteristics, such as items billed in the last week or billed to specific parties. The sample size of the other items to be tested should be based on the same factors used in statistical sampling. In terms of selecting the sample, the auditor should take steps to increase the likelihood that the sample is representative of the population. The auditor may obtain a representative sample using a random based method 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 judgmentally consider that allowance.

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. $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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.125 - Using Sampling to Test Account Balances and Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills Cengage Learning Testing, Powered by Cognero

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Chapter 8 - Specialized Audit Tools: Sampling and Generalized Audit Software United States - AK - AICPA BB-Critical thinking

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Chapter 9 - Auditing the Revenue Cycle 1. The revenue cycle considered by auditors includes the sales process but not collections. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 2. The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction and collecting the receivable. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 3. The shipping department confirms the shipment of goods by completing the packing slip and returning it to the purchasing department. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 4. Monthly statements provide a detailed list of the customer’s activity for the previous month and a statement of all open items. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 5. Invoices are processed, including their mailing to customers, only subsequent to proof of valid delivery to customers. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle TOPICS:

Cycles

6. The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 10. For many clients, the valuation assertion is the most significant assertion in testing revenue. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle LEARNING OBJECTIVES: AUDT.JOHN.10.09.05 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Significant Accounts, Disclosures and Relevant Assertions 11. An appropriate mix of evidence for a low risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high risk client could include 60% tests of details, 20% analytics, and 20% tests of controls. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 15. The basic concept for revenue recognition is the realization of cash. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.09-02 - LO: 09-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Performing Risk Assessment Procedures in the Revenue Cycle 16. A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings goal. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.09-02 - LO: 09-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Performing Risk Assessment Procedures in the Revenue Cycle 17. A consistent pattern of earnings growth would eliminate the auditor’s concern for fraud in revenue recognition. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.09-03 - LO: 09-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Identify and Assess Fraud Risks in the Revenue Cycle 18. An attitude of professional skepticism by the auditor is not needed when internal controls over revenue have been tested and found to be effective. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.09-03 - LO: 09-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Identify and Assess Fraud Risk in the Revenue Cycle 19. The auditor should be alert to the risk of material misstatements when cash flows from operations are negative and net income (rather than loss) is reported. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Analytics 20. Ratio analysis performed by the audit team may include the comparison of gross profit percentage to industry averages. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.09-05 - LO: 09-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Performing Preliminary Analytical Procedures for Revenue Cycle Accounts 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Analytics 22. Edge and Gregg, LLP would most likely discover a client’s first-time use of channel stuffing through the use of trend analysis. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.09-05 - LO: 09-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Performing Preliminary Analytical Procedures for the Revenue Cycle 23. Use of reasonableness tests by Bono Mullins, PC will include relationships between financial but not nonfinancial data. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Analytics 24. The auditor has determined that the control risk for the existence assertion is low; therefore the auditor may Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle reduce the number of items tested on a substantive basis. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Controls 25. Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been sold to the bank on a recourse basis. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions in the Revenue Cycle 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit of Allowance 27. Current auditing standards do not require the confirmation of receivables if accounts receivable are not material. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing of accounts Receivable 28. Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 29. Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 30. Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 31. Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 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. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 34. An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Controls 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Controls 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Linkage 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Planning 38. A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit.

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Chapter 9 - Auditing the Revenue Cycle a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Planning 39. Material debit balances in accounts payable for amounts due from vendors should be reclassified as accounts receivable. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions in the Revenue Cycle 40. The use of audit software makes the audit of the revenue cycle more effective, but not more efficient. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 41. Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately prior to period end and immediately following period end. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 42. Valid evidence obtained in an audit for testing the cutoff of gross sales includes receiving reports for returned merchandise. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures and Assertions in the Revenue Cycle 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 44. Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions in the Revenue Cycle 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. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 46. A timing difference type of exception in the confirmation process may include a misunderstanding by the reader as to the date being confirmed. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 47. Negative confirmations are considered to be more persuasive than positive confirmations.

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Chapter 9 - Auditing the Revenue Cycle a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 48. The purpose of summarizing confirmation results is to list the extent of sales tested in relation to the response rate. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 49. An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 50. Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Fraud Indicators 51. The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be indicators of fraudulent activity. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Fraud Indicators Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle 52. Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales. a. True b. False ANSWER: False POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit of Allowance 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. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit of Allowance 54. It is beneficial in the testing of notes receivable to confirm not only the balance of the notes, but also their terms. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit of Allowance 55. The most important control to ensure completeness of sales and shipping is pre-numbered shipping and billing documents. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Planning 56. An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts. a. True b. False ANSWER: True POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle TOPICS:

Audit of Allowance

57. 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 58. 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 59. Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper? a. Sales invoice b. Receiving report c. Bill of Lading d. Purchase order ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.05 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Significant Accounts, Disclosures and Assertions in the Revenue Cycle 60. Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives? a. To determine revenue recognition policies. b. To ensure customer satisfaction. c. To prevent lapping by the accounts receivable department. d. To ensure the realization of receivables.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 61. Sales transactions should be documented at initiation in order to accomplish which of the following objectives? a. To provide the customer a copy of the transaction. b. To provide evidence of authorization and recording. c. To offer credit to customers. d. To generate back orders.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 62. The significance of the bill of lading is to provide which of the following? 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Cycles 63. 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. ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 64. A method used by companies to fraudulently inflate revenues includes which of the following? 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.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 65. Which of the following evidences delivery of product to customers sufficient for company recording as revenues? a. A check received from the customer. b. An agreement to purchase product signed by the customer. c. A pick ticket in the warehouse. d. A bill of lading and tracking number with the shipper.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 66. 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 67. 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Fraud 68. Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing which of the following? a. Trend analysis. b. Ratio analysis. c. Reasonableness testing.

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Chapter 9 - Auditing the Revenue Cycle d. Non-statistical sampling.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Analytics 69. A cross-sectional analysis of revenue recorded across multiple sales location is a form of what type of testing? a. Trend analysis b. Common size analysis c. Ratio analysis d. Regression analysis ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions in the Revenue Cycle 70. Lithgow and Harris, CPAs are performing the audit of WildFlower Grocery Stores. Lithgow and Harris relates annual revenue by sales per square feet and sales per customer. What type of analysis is Lithgow and Harris most likely performing? a. Ratio analysis. b. Critical analysis. c. Reasonableness tests. d. Non-statistical analysis.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Analytics 71. In an audit of financial statements, the risk of the high rate of return of products sold includes relates to which of the following? 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle 72. The major risk associated with receivables is related to which of the following? 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 73. 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 74. A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following? 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 75. The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total. This process is performed for which purpose? a. Drafting financial statements. b. Monitoring revenue transactions. c. Providing management reports to the controller. d. Providing suggestions for operational improvement.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle 76. Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following? 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Risks 77. 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 which assertion? a. Existence of receivables. b. Cutoff of receivables. c. Valuation of receivables. d. Rights to receivables.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Planning 78. What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate? a. Accounts receivable aging schedule. b. Copies of checks received from customers. c. Confirmations returned without exception. d. Stock prices of customer companies.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 79. Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks? 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.

ANSWER: a Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 80. The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate which assertion? a. Cutoff. b. Completeness. c. Legality. d. Occurrence.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 81. In the audit of the revenue of Hiram 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 which of the following assertions? a. Existence of sales. b. Presentation and disclosure of receivables. c. Cutoff of sales transactions. d. Completeness of receivables.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 82. Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following? 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Revenue 83. Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions? a. Existence of related party transactions. b. Existence of accounts receivable.

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Chapter 9 - Auditing the Revenue Cycle c. Obligation of debt. d. Cutoff of the allowance for bad debt.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 84. The aged accounts receivable report is utilized by the auditor to accomplish which of the following? 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 85. According to auditing standards, accounts receivable confirmations are required to be used in which of the following situations? 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 86. The primary difference between positive and negative confirmations used in the audit of accounts receivable is which of the following? a. The mode of response. b. The amount of information included. c. The control of the confirmation process by the auditor. d. The method in which accounts are selected for confirmation.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures,and Assertions in the Revenue Cycle 87. For which of the following accounts receivable customer populations would the use of negative Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 88. Accounts receivable confirmations usually provide strong evidence about which of the following? a. The existence of receivables. b. The completeness of receivables. c. The presentation and disclosure of receivables. d. The obligations of receivables.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 89. 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 by which of the following terms? a. Direct confirmations. b. Indirect confirmations. c. Positive confirmations. d. Negative confirmations.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 90. 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.

ANSWER: c Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 91. An auditor's examination of the sales account using a cut-off test would most likely detect which of the following? a. Kiting. b. Sales made with improper credit terms. c. Lapping of accounts receivable. d. Sales recorded in the wrong period.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.10.09.01 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions in the Revenue Cycle 92. Alternative procedures that would provide evidence of the existence of receivables would include which of the following? 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.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 93. Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons? 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 94. Unreturned positive confirmations for accounts receivable warrant which of the following actions? a. Replacing the sample selection with a new customer. b. Sending second requests and possibly performing subsequent procedures.

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Chapter 9 - Auditing the Revenue Cycle c. The projection of larger misstatements to the population. d. Requesting that the client send additional audit correspondence to customers.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 95. An example of alternative procedures for the confirmation of accounts receivable includes which of the following actions? 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 96. A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following? 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Fraud Indicators 97. In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following? a. All material accounting estimates have been developed properly. b. The estimates are reasonable. c. The estimates are presented in accordance with GAAP. d. All of the above are true.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit of Allowance 98. The allowance for doubtful accounts will not be precise by either the client or the auditor because of which of the following reasons? a. It is an accounting estimate based upon judgment.

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Chapter 9 - Auditing the Revenue Cycle b. GAAP 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit of Allowance 99. To determine whether any accounts receivable are pledged or assigned to others, the auditor would most likely perform which of the following procedures? a. Examine subsequent collections. b. Test a sample of transactions to the general ledger. c. Review loan agreements and board of directors' meeting minutes. d. Derive an independent estimate of the allowance and compare it to pledged assets.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Testing Accounts Receivable 100. 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 101. 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Revenue Recognition 102. Which of the following is not a form of ratio analysis?

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Chapter 9 - Auditing the Revenue Cycle a. Turnover of receivables. b. Monthly sales analysis compared with past years. c. Gross margin analysis. d. Sales in last month to total sales.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Analytical Procedures 103. Sources of audit planning information may come from which of the following? 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.

ANSWER: d POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Planning 104. 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.

ANSWER: a POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Substantive Tests of Revenue 105. 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.

ANSWER: c POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Substantive Tests of Revenue 106. A sample of positive confirmations is mailed for material accounts receivable balances. Frequently there is Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle a lack of response. Which of the following is not an acceptable alternative procedure? a. Reviewing collections on the account subsequent to the confirmation date. b. Inquiry of management. c. Mailing second and third confirmations. d. Examination of supporting documents.

ANSWER: b POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Confirmations 107. Internal control over the revenue cycle White Floyd, Inc., 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 GAAP. Recommend control procedures to help ensure that transactions are recorded accurately and valued properly.

ANSWER: 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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Risks 108. Control over completeness for the revenue cycle What control procedures should be implemented to ensure the completeness objective is met with respect to sales?

ANSWER: Control procedures to ensure that the objective of completeness is met for the revenue accounts are: Prenumbered shipping and invoice documents should be used and ∙ accounted for periodically.

Online 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 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle ∙ ∙ ∙

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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Risks 109. 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.

ANSWER: Potential risks associated with accounts receivable include: Sales of receivables made with recourse and recorded as sales ∙ transactions rather than financing transactions.

Receivables pledged as collateral against specific loans with restricted ∙ use. Disclosures of such restrictions are required.

Receivables incorrectly classified as current when the likelihood of ∙ collection during the next year is low.

Collection of a receivable contingent on specific events that cannot ∙ currently be estimated.

Payment is not required until the purchaser sells the product to its end ∙ customers.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Risks 110. Substantive procedures for sales and receivables assertions The auditor for Knowles, Inc. 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.

ANSWER: 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 POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Planning 111. 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.

ANSWER: 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. ∙ inquire of management. ∙ review work performed in other audit areas. ∙ review trial balance of accounts receivable for related parties.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Testing Accounts Receivable 112. 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.

ANSWER: 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.

POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Revenue Recognition 113. Analytical Procedures Explain ratio analysis as an analytical procedure used by auditor. Give examples of the ratios that auditor might want to compute for revenue cycle accounts.

ANSWER: Ratio analysis is useful in highlighting account balances that are out of line or different from reasonable expectations. Ratios can be compared across time for a client, as well as compared with the industry ratios. The approach to ratio analysis is similar to what a financial analyst would perform in examining a financial statement. Auditors might want to compute ratios like: *Gross margin analysis, including a comparison with industry averages and previous year’s averages for the client *Turnover of receivables (ratio of credit sales to average net receivables) or the number of days’ sales in accounts receivable *Average balance per customer *Receivables as a percentage of current assets *Aging of receivables *Allowance for uncollectible accounts as a percentage of accounts receivable *Bad debt expense as a percentage of net credit sales *Sales in the last month to total sales *Sales discounts to credit sales *Returns and allowances as a percentage of sales POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Analytical Procedures 114. Requirements for confirming accounts receivable Confirmation of accounts receivable is required under GAAS unless certain conditions exist. Identify the conditions that will be present in an audit that does not confirm accounts receivable.

ANSWER: 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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Testing Accounts Receivable Cengage Learning Testing, Powered by Cognero

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Chapter 9 - Auditing the Revenue Cycle 115. 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 $800 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?

Auditors may select positive or negative confirmations depending on the circumstances.

ANSWER:

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.

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.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Testing Accounts Receivable 116. Confirmations of receivables at an interim date When internal controls are strong, the auditor may decide to confirm receivables before year end. Roll-forward 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 rollforward procedures that the auditor performs to gain assurance on the roll-forward period.

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Chapter 9 - Auditing the Revenue Cycle ANSWER:

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 rollforward 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. * Compute the gross profit percentage during the roll-forward period, and compare that to the percentage for the year and for prior periods.

POINTS: 1 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Confirmations of Receivables at an Interim Date

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Chapter 10 - Auditing Cash and Marketable Securities 1. An imprest payroll account should never reach a zero balance. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.133 - Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 2. Automated controls over cash eliminate the inherent risks associated with the cash account. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-02 - LO: 10-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risks in Cash Accounts 3. Cash flow is often managed by organizations through the use of lockboxes and outsourced cash management arrangements with banks. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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 because the action does not affect cash balances. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 5. The audit of the cash account is inherently risky due to volume of activity, liquidity and the account's susceptibility to fraud. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 6. Working capital may be tied to certain debt covenants causing cash to be considered significant for audit purposes. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 7. The existence or occurrence assertion as related to cash is concerned with proper classification on the balance sheet. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.133 - Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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 in a timely manner. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 10. The deposit of cash directly at the bank to speed collections often involves the use of a lockbox. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 11.

When a lockbox is used, the financial institution records the deposit and then forwards customer transaction data to the client to update cash and accounts receivable records. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 12. The auditor is responsible for auditing the necessary disclosures when material lines of credit and compensating balance arrangements have been made by the client with a lender. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 13. Electronic Funds Transfers have controls built into the process and do not require further reconciliation by the client. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities 14.

The auditor’s performance of an independent reconciliation of the client’s bank accounts provides evidence as to the rights and obligations of the year-end cash balances. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 15. Customer checks received at the client company should be restrictively endorsed within one week of receipt in the mail. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 16. A turnaround document is an effective control because it lists useful information for further processing of the collection on account. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 17. In assessing risk relating to fraud, auditors brainstorm about potential fraud risks. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 18. Auditors usually perform relatively limited substantive analytics for cash accounts and instead focus on substantive tests of details. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 19. The cash balance that a financial institution requires its customer to maintain in a non-interest-bearing account to offset a line of credit is a compensating balance. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.133 - Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 20. Bank reconciliations should be performed by the individual who makes bank deposits. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-04 - LO: 10-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risk in Cash Accounts 21. Internal audits are seldom an effective deterrent to the theft of cash. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 22. An independent bank reconciliation provides evidence of the correctness of the year-end cash balance. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 23. The primary purpose of the cutoff bank statement is to verify the reconciling items on the bank reconciliation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 24. Kiting is an example of a technique used to intentionally and materially overstate cash. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 25. The standard bank confirmation is used by the auditor to test for lapping. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 26. The standard bank confirmation should be sent to all banks used by the client during the year except those with a zero balance. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 27. The auditor may discover evidence of lapping by preparing an interbank transfer schedule.

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Chapter 10 - Auditing Cash and Marketable Securities a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 28. The standard bank confirmation includes the confirmation of cash accounts but not liabilities with financial institutions. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 29. Kiting fraudulently places the company's marketable securities in the name of the officers. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 30. 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 31. The cutoff statement is mailed to the client for an agreed upon-date and then copied for the audit files. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

32. The valuation/allocation and completeness assertions are usually the most relevant for auditing cash. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-01 - LO: 10-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Significant Accounts, Disclosures and Assertions in Auditing Cash 33. The recording of a marketable security depends, in large part, on management’s intention with the investment. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 34. Notes issued by major corporations are known as commercial paper. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 35. The auditor obtains the current market value of marketable securities by confirmation with the holder of the security. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities 36. Commercial paper is the term applied to notes issued by those major corporations with poor credit ratings. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 37. Auditors test the assertion of completeness by determining if any restrictions on the use of commercial paper by an entity are disclosed in the footnotes. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 38. The valuation assertion is most relevant to the audit of marketable securities. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.133 - Accounts, Disclosures, and Relevant Assertions AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 39. Testing debt securities and commercial paper would typically include an analysis of interest income. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 40. Gains and losses are not considered in audit testing, as they do not need to be disclosed. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 41. The ending price of securities can be verified through reliable publications and websites such as the Wall Street Journal. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 42. All marketable securities are carried at fair market value on the balance sheet. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-09 - LO: 10-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Marketable Securities 43. Thinly traded securities have a greater inherent risk related to valuation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-09 - LO: 10-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Marketable Securities 44. Effective internal control over the cash account requires that the person responsible for making the bank deposit does not post the increase to cash in the accounting system. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

45. Which one of the following risks is not a risk associated with cash? a. The large volume of transactions. b. Importance of meeting debt covenants. c. Valuation issues are typically complex. d. Easy to manipulate.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-02 - LO: 10-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risks in Cash Accounts 46. Which of the following is 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? a. Lockbox. b. Bank transfer. c. Imprest bank account. d. Imprest Account.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 47. The cash account is significant 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. Cash is the only account that provides opportunity for fraud. d. Automated systems do not possess the capability to maintain strong internal controls over cash.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.133 - Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 48. Which of the following situations would normally be discovered as part of the test of the bank reconciliation? a. Failure to bill a customer. b. Failure to include a deposit in transit on the bank reconciliation.

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Chapter 10 - Auditing Cash and Marketable Securities c. Duplicate payment of a vendor’s invoice. d. Payment to an employee for more hours than she worked.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 49. Management has developed cash management techniques for which of the following reasons? a. Increase the time to collect billings. b. Reduce the amount of volume of cash transactions. c. Automate the cash management process. d. Increase the liquidity of cash balances.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 50. Lockbox arrangements for the collection of cash have which of the following advantages? 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 only one lockbox geographically next to the client to minimize delay in collections. d. Eliminates the customer decision for the due date of payment.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 51. A company must do which of the following, if a company maintains a material compensating balance of cash? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-01 - LO: 10-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities STATE STANDARDS: TOPICS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Identify Significant Accounts, Disclosures, and Assertions in Auditing Cash

52. A compensating balance arrangement usually results in which of the following for a company? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 53. Which one of the following is not a fundamental internal control the auditor would expect to find in place for a cash processing system? a. Segregation of duties b. Electronic payments c. Authorization of transactions d. Periodic internal audits ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 54. During the testing of a year end bank reconciliation, an auditor noticed that the majority of checks listed as outstanding at year-end had not cleared the bank. Which of the following is a likely explanation? a. A high probability of kiting. b. A high probability of lapping. c. The year-end cash disbursements records had been closed prior to year-end. d. The year-end cash disbursements records had been held open past year-end.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 55. As cash processing systems become more automated and integrated, which of the following is true about the general concept of segregation of duties? a. Segregation of duties becomes less important. b. Segregation of duties becomes more important.

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Chapter 10 - Auditing Cash and Marketable Securities c. The importance of segregation of duties does not change. d. Segregation of duties becomes completely computerized without human involvement.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 56. Which of the following controls would be most successful in mitigating the theft of customer checks received in the mail? a. Custody of receipts by the accounts receivable manager. b. Restricted endorsements placed on the check as soon as it arrives. c. Weekly deposits to a secure bank. d. Reconciliation of bank accounts each month.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 57. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 58. What form of evidence is used by the auditor to verify bank reconciliation items? a. Cash counting observation. b. General ledger. c. Bank confirmation d. Cutoff statement.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities 59. Electronic authorization privileges for cash transactions may be best assigned to individuals based on which of the following? 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".

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 60. Which of the following describes documents that accompany customer payments to help the clerk identify the payments? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 61. Which of the following best describes kiting? a. Theft of cash for personal use and cover-up using the bank statement. b. A fraudulent cash scheme to overstate cash assets at year end by manipulating year-end transfers between cash accounts. c. Manipulation of financial reporting by increasing both cash and debt by the same amount. d. Colluding to steal cash by wiring money to a fictional vendor and concealing it with customer payments.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-08 - LO: 10-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Cash Accounts, Disclosures, and Assertions 62. Which of the following represents a typical substantive audit procedure for cash balances? a. Verify material deposits-in-transit to subsequent statements. b. Review cash confirms received by the client from the bank.

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Chapter 10 - Auditing Cash and Marketable Securities c. Foot cutoff bank statements provided by the financial institutions. d. Perform kiting techniques to transfer cash between two client accounts.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 63. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 64. Which of the following is the primary reason the auditor obtains and reviews a cutoff bank statement? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 65. The auditor will send a standard bank confirmation to which of the following? a. Financial institutions of customers using the lockbox. b. Financial institutions for which the client has a balance greater than $0 at the end of the year. c. Financial institutions with which the client has transacted during the year. d. Financial institutions used by significant shareholders.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 66. The ease with which cash can be stolen is most related to which of the following risks?

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Chapter 10 - Auditing Cash and Marketable Securities a. Control risk. b. Inherent risk. c. Detection risk. d. Liquidity risk.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 67. Which of the following best describes 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? a. Lapping of cash. b. Kiting of cash. c. Embezzlement of cash. d. Restrictive endorsements of cash.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 68. The emphasis in verifying petty cash is normally on which of the following? a. Year-end balance. b. Controls over petty cash. c. Transactions for the period. d. Balance sheet classification.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 69. When auditing marketable securities, the auditor will do which of the following? 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.

ANSWER: e POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 70. The reported fair market value of securities held by the client can be verified by the auditor through which of the following procedures? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 71. Which of the following items would not normally appear on bank reconciliations? a. Balance per bank. b. Outstanding deposits list. c. Balance per books. d. Outstanding checks list.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 72. Investments in securities are classified as which of the following? a. Held-to-maturity. b. Trading securities. c. Available-for-sale securities. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 73. Which of the following is the most relevant assertion with regards to the audit of cash? a. Existence b. Rights and obligations. c. Valuation and allocation.

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Chapter 10 - Auditing Cash and Marketable Securities d. Presentation and disclosure.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-01 - LO: 10-01 STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify the Significant Accounts, Disclosures, and Assertions in Auditing Cash 74. Which of the following would not be used as part of analytical procedures for marketable securities? a. Develop expectations about the level of amounts in ending balances. b. Develop expectations about the relationship between the balances. c. Verify ending balances prior to calculating the percent change. d. Review changes in the balances, risk composition, and classification types.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 75. Which of the following would the auditor use to determine the existence of investments? a. Footing the schedule of recorded investments. b. Confirming or examining recorded investments. c. A schedule of investments sold during the year. d. Recomputing interest and/or gains and losses.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-09 - LO: 10-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Marketable Securities 76. Which assertion related to investments is tested when the auditor examines the documents for any restrictions? a. Existence. b. Rights. c. Completeness. d. Valuation.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities United States - AK - AICPA BB-Critical thinking 77. Which of the following is required by accounting standards for the presentation and disclosure of investments in marketable securities? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 78. Which of the following procedures does the auditor typically perform when testing the existence of cash? a. Counting cash at the depository institution. b. Inquiry of management. c. Sending a standard bank confirmation. d. Tracing the bank reconciliation to the general ledger.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 79. When testing cash balances at the balance sheet date, the auditor foots the bank reconciliation and traces its reported book balance to the trial balance and its bank balance to the standard confirmation. Which of the following assertions is being tested with these procedures? a. Rights. b. Valuation. c. Existence. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 80. Assume that an auditor notes a large series of checks that does not clear the bank for an unusually long time after period end. Which of the following would the auditor likely suspect from this observation? a. Vendors are eager to get their payments. b. The reconciliation is accurate. c. Cash does not exist.

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Chapter 10 - Auditing Cash and Marketable Securities d. The presence of held-checks at period-end.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 81. The standard bank confirmation includes a designated place for the financial institution to report which of the following? a. Loans and collateral. b. A reconciliation of the lockbox. c. Cash held on consignment. d. Maturity dates for certificates of deposit.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 82. Which of the following is not a common test of control for marketable securities? a. Review the minutes of the board meetings. b. Review broker’s advice for accurate recording of security c. Inquire of management about its process for reclassifications. d. Review reports of internal audits.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 83. Which of the following would be used by the auditor to address kiting? a. Cut-off bank reconciliations. b. Bank transfer schedules. c. Bank confirmations-account balances. d. Bank confirmations-loan guarantees.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 84. Bank transfer schedules are used by the auditor to address which of the following concerns?

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Chapter 10 - Auditing Cash and Marketable Securities a. Lapping. b. Kiting. c. Embezzlement by omitting outstanding checks on reconciliation. d. All of the above.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 85. The cutoff bank statement is used by the auditor to address which of the following concerns? a. Lapping. b. Kiting. c. Omitting outstanding checks on reconciliations. d. All of the above.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.10-08 - LO: 10-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Cash Accounts, Disclosures, and Assertions 86. Which of the following would not be included as part of the documentation related to the substantive procedures for marketable securities? a. A schedule of marketable securities prepared by the client. b. Reports of any outside valuation experts. c. Calculation of any potential impairments. d. Policies over purchase or sale of marketable securities.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 87. Which of the following is not a reason for a client to employ cash management techniques? 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.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 88. Which of the following is not a 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 89. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 90. Which of the following is not an internal control 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 91. Which of the following is not a normal edit test as part of computerized control for checks? a. Field checks. b. Self-checking digits.

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Chapter 10 - Auditing Cash and Marketable Securities c. Cross-references. d. Reasonableness tests.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 92. Imprest payroll account What is an imprest payroll account and why is it used by companies?

ANSWER: 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 93. Lockbox utilization Describe the cash management technique of a lockbox, including why it is used.

ANSWER: 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 94. Cutoff statement What is a bank cutoff statement and how is it used by an auditor?

ANSWER: The bank cutoff statement is a bank statement for the client prepared at an agreedupon 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.

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Chapter 10 - Auditing Cash and Marketable Securities POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 95. Auditing marketable securities List the common substantive procedures used to address the risks relating to fraud in investments: • Employment of a specialist to assist in fair value measurements.

ANSWER:

• Conduct background checks on and credit ratings of employees who have access to investment accounts, or the authorization to purchase or sell securities.

• Require that the client produce original documentation of securities, not copies or faxes.

• Trace dividend payments, interest payments, and sales of securities to cash deposits recorded on the bank statement.

• Trace purchases of securities to cash disbursements on the bank statement.

• Review any unusual journal entries in investment accounts.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 96. Types of Controls Identify the types of controls used to minimize potential misstatements of cash.

ANSWER: In order to minimize possible misstatements of cash, the auditor expects to find the following internal controls: •Separation of duties •Restrictive endorsements of customer checks •Independent bank reconciliations •Computerized control totals and edit tests •Authorization of transactions •Prenumbered cash receipt documents and turnaround documents •Periodic internal audits •Competent, well-trained employees POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 97. Fraud by kiting Describe the concept of kiting and identify the best method for the auditor to use to detect kiting.

ANSWER: 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 Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities time. The most effective and efficient method of uncovering kiting is the preparation of a bank transfer schedule by the auditor.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 98. 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.

ANSWER: 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.

Review of investment agreements, including Presentation & Disclosure specification of collateral.

Determine management's intent to hold securities as short-term investments or for the Presentation & Disclosure longer term and document those intentions in the management representation letter.

Determine whether securities are properly classified and disclosed as trading, availablePresentation & Disclosure for-sale, held to maturity or on the equity method and that any restrictions are appropriately disclosed.

Review of collateral if the auditor determines Valuation that the collateral is important to the valuation of the account.

Determine fair market value of recorded Valuation securities through reference to a credible financial publication or trusted financial website.

Examine securities and related documents to ensure that the investments are in the name of Rights the organization and that there are no restrictions.

Review of broker's advices evidencing the cost Completeness or sales price of the securities and the timing of transactions for cutoff.

Analytical review for reasonableness of interest Completeness/Valuation and dividend income.

Obtain and foot a schedule of all marketable Completeness securities held at period-end.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.139 - Audits of Marketable Securities Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities STATE STANDARDS:

United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking

99. Financial Statements Assertions Describe the management assertions relevant to cash and other liquid assets.

ANSWER: The five management assertions relevant to cash and other liquid assets are as follows: 1. existence—cash balances exist at the balance sheet date 2. completeness—cash balances include all cash transactions that have taken place during the period 3. rights and obligations—the organization has title to the cash accounts as of the balance sheet date 4. valuation—recorded balances reflect the true underlying economic value of those assets 5. presentation and disclosure—cash and other liquid assets are properly classified on the balance sheet and disclosed in the footnotes POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.133 - Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 100. 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.

ANSWER: The standard bank confirmation is sent to each bank that the company has transacted business with during the year, whether it currently has a balance or not.

Even though 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 10 - Auditing Cash and Marketable Securities 101. Cut-off bank statements Explain what is meant by a cutoff bank statement, and discuss the purpose of the cutoff bank statement in the audit of cash.

ANSWER: A cutoff bank statement is a partial-period bank statement and the related copies of canceled checks, duplicate deposit slips, and other documents included in bank statements, mailed by the bank directly to the CPA firm's office. The purpose of the cutoff bank statements is to verify the reconciling items on the client's year-end bank reconciliation with evidence that is not accessible to the client.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle 1. The acquisition and payment cycle includes processes for identifying products or services to be acquired, purchasing goods and services, receiving the goods, approving payments, and paying for goods and services received. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.140 - Introduction STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 2. The major accounts in the acquisition and payment cycle are inventory, cost of goods sold, accounts payable, and other expense accounts. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 3. An indication of potential inventory fraud is that inventory levels are growing faster than sales. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.142 - Fraud STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 4. The acquisition process begins with a purchase of goods or services. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 5. Supply chain management has helped many companies improve the efficiency of operations. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.143 - Supply Chain STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 6. Management may intentionally misstate inventory balances by overvaluing items that are obsolete. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.142 - Fraud STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 7. Most organizations use a perpetual inventory system to manage inventory. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.144 - Analytics STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 8. Inventory turnover is often calculated by the auditor for proper disclosure in client financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.144 - Analytics STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 9. A networked software system linking a company’s information system to vendors whose offerings and prices have been preapproved by appropriate management is called an automated purchasing system. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-01 - LO: 11-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle STATE STANDARDS: TOPICS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Identify the Significant Accounts, Disclosures, and the Relevant Assertions in the Acquisition and Payments Cycle

10. A major control benefit of a centralized purchasing department is the segregation of the authorization function from the custody and recording functions. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 11. A purchase order identifies the quantity and description of products that have been received. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 13. A new vendor should be added to an authorized vendor database by an individual in the purchasing department. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-04 - LO: 11-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle STATE STANDARDS: TOPICS:

United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Identify and Assess Control Risks in the Acquisition and Payment Cycle

14. The auditor's primary concern with accounts payable is that of existence. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 15. Reconciliation of vendor statements to recorded payables provides assurance related to the completeness assertion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 16. Approval of items for payment usually involves a three-way match among the vendor invoice, the purchase order, and the receiving report. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 17. The purchasing department should make sure that only authorized goods are received, the goods meet order specifications, an accurate count of the goods received is taken, and that accountability is established to assure that all receipts are recorded. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle United States - AK - AICPA BB-Critical thinking 18. In an audit where there is a heightened risk of fraud related to inventory, the auditor may want to observe all inventory locations simultaneously. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 24. The lower of cost or market assumption is not important to valuation of inventory. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 25. Proper internal control over the inventory account would require that inventory items should be reviewed for obsolescence and proper accounting treatment. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 26. Many frauds are committed by overstating inventory accounts. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 27. Inventory may become obsolete because of technological advances even though there are no signs of physical wear. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.149 - Inventory Complexity STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 28. Sources of information regarding a client's inventory obsolescence can be partially noted during the inventory observation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 29. The auditor is required by generally accepted accounting principles (GAAP) to observe the taking of physical inventory. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 30. One reason the inventory observation is performed is for the purpose of determining the accuracy of client counting procedures. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle 31. Test counts are performed by the auditor to give the impression of control and they are not used for substantive testing. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 32. It is likely in the acquisition and payment cycle that audit evidence from substantive analytical procedures alone will be sufficient enough for the auditor. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 33. During the counting process of inventory, the client arranges not to ship or receive goods or segregates all goods received during the process to be labeled and counted as “after inventory.” a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 34. Legal expenses are reviewed by auditors for possible litigation and related FAS 5 treatment. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 35. A walkthrough is typically not a useful means of obtaining information about controls in the acquisition and payment cycle. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-04 - LO: 11-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle 36. The cash account is not part of the acquisitions and payment cycle. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 37. The auditor may test a manufacturing client's cost system to substantiate the valuation of inventory. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 38. Valuation is the most complex assertion related to inventory. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.149 - Inventory Complexity STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle 39. Generally accepted auditing standards (GAAS) require the auditor to observe the taking of the physical inventory at year-end. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 42. In computerized purchase operations 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 43. The tracing of a sample of receiving reports through the recording process tests the completeness assertion.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 44. Substantive tests of accounts payable and related expense accounts for valuation usually involve simply verifying the mathematical accuracy of the accounts, and agreeing them to general ledger and supporting documentation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.150 - Testing of Expense Accounts STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.151 - Test of Inventory STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 46. Stable relationships are expected between specific accounts (for example, cost of goods sold and sales) that can be investigated for unusual discrepancies. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.152 - Testing of Expenses STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 47. The acquisition and payment process consists of each of the following phases except which of the following? a. Receipts of goods and services.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle b. Approval of items for payment. c. Application of cash receipts. d. Authorized request for goods and services.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 48. Which of the following accounts is NOT a major account in the acquisition and payment cycle? a. Inventory. b. Cost of goods sold. c. Accounts payable. d. All of the above are major accounts.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 49. Which of the following is not a rationale for purchasing to be a separate function? a. Purchasing promotes efficiency and effectiveness. b. Purchasing eliminates potential favoritism. c. Purchasing reduces the opportunity for fraud. d. Purchasing decentralizes control.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-04 - LO: 11-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks in the Acquisition and Payment Cycle 50. When a purchasing agent benefits personally by accepting payment from a vendor, the purchasing agent is guilty of which of the following? a. Performing kiting. b. Committing embezzlement. c. Receiving kickbacks. d. Stealing company assets.

ANSWER: c POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 51. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 52. Which of the following is not a management assertion relevant to inventory? a. Existence or occurrence. b. Completeness. c. Rights and obligations. d. Reporting.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 53. Which of the following is NOT an example of fraud in the acquisition and payment cycle? a. Theft of inventory by employees. b. Inventory shrinkage. c. Large manual adjustments to inventory accounts. d. Excess inventory because of a production slowdown.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.142 - Fraud STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 54. The internal control that requires that “checks are pre-numbered and accounted for” satisfies which assertion? a. Accuracy. b. Existence.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle c. Completeness. d. Posting and summarization.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 55. Which of the following would meet the need for additional control procedures when using computergenerated purchase orders? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 56. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.142 - Fraud STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 57. Accounting for inventories is a major consideration for many companies because of its significance to which of the following financial statements? a. Balance sheet. b. Income statement. c. Statement of Cash Flow d. Both A and B. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle United States - AK - AICPA BB-Critical thinking 58. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.142 - Fraud STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 59. 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. Days outstanding in accounts payable. d. Salaries of marketing personnel as a percent of total inventory.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-05 - LO: 11-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures in the Acquisition and Payment Cycle 60. Which relationship might suggest a heightened risk of fraud in the acquisition and payment cycle? a. Unexpected increases in the number of suppliers. b. A reduction in raw material costs. c. Maturing capital assets with no plan for replacement. d. Sales expenses growing in proportion to sales revenue.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-05 - LO: 11-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures in the Acquisition and Payment Cycle 61. During your audit of Brown Company you are trying to determine whether all accounts payable were Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle recorded. Which assertion are you gathering evidence for? a. Occurrence. b. Presentation and Disclosure.. c. Completeness. d. Valuation or allocation.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 62. Which of the following procedures would the auditor perform in testing the completeness assertion for accounts payable? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 63. Why should the client’s legal expenses be examined? a. To compare with previously released attorney's letters. b. To determine the types of fraud occurring in the organization. c. To ensure proper recording of vendor payables. d. To determine if there is any litigation pending or threatened.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 64. Which assertion has the greatest emphasis when auditing accounts payable? a. Existence. b. Completeness. c. Presentation. d. Disclosure.

ANSWER: b Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 65. An auditor may best test commissions expense for salespeople when control risk is low by performing which of the following procedures? a. Analytical procedures. b. Tagging and tracing. c. Alternative procedures. d. Subsequent proof of cash.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.144 - Analytics STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 66. An internal control benefit of centralized purchasing in an organization includes which of the following? a. Separation of authorization from the custody and recording function. b. An increase in the number of vendors used. c. Increased compensation of agents through side agreements. d. Mathematically accurate vendor invoices.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-04 - LO: 11-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Identify the Significant Accounts, Disclosures, and Assertions in the Acquisition and Payment Cycle 67. A primary feature of automated control in the acquisition cycle includes which of the following? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle 68. Bar code scanning may best be utilized in the receiving process to accomplish which of the following? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 69. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 70. Please indicate the proper sequence of the acquisition cycle: 1. Approval of items for payment.

2. Authorized requisition for goods or services.

3. Cash disbursements.

4. Receipt of goods and services.

5. Authorized purchase of goods or services. a. 2, 5, 4, 1, 3 b. 2, 4, 5, 1, 3 c. 2, 1, 4, 5, 3 d. 2, 5, 1, 4, 3 ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.153 - Acquisition cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 71. Which one of the following accounts would an auditor most likely test by performing analytical procedures? a. Sales commissions expense. b. Legal expenses.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle c. Repairs and maintenance expense. d. Travel expense.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.144 - Analytics STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 72. Which of the following is NOT a reason why inventory is a complex accounting and auditing area? a. Diversity of items in inventory. b. Low volume of activity. c. Easily transportable. d. Difficulty in applying the lower of cost or market principle.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.149 - Inventory Complexity STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 73. Which of the following is a reason why an automated purchasing system is beneficial? a. It applies preloaded specifications and materials lists to the system. b. It automatically flags invoices that do not reconcile with purchase orders. c. It creates change orders and analyzes variances from purchase orders. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.141 - Payment and Acquisition Cycle STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 74. Which of the following is not an inherent risk associated with inventory? a. Inventory accounts typically have a high volume of activity. b. Inventory is easily transportable c. Inventory may become obsolete. d. Inventory costing methods frequently change from one year to the next.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-02 - LO: 11-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle TOPICS:

Identify and Asses the Risk of Misstatement in the Acquisition and Payment Cycle

75. Which of the following is NOT a element of internal controls for inventory? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 76. Which of the following would the auditor most likely do when testing the existence assertion for inventory? a. Observe the client's count of the annual physical inventory and perform test counts. b. Review vendor invoices for the amounts recorded. c. Review open purchase orders at year end. d. Trace raw material purchases to invoices and to the general ledger.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle 77. Which of the following would the auditor most likely do when testing the valuation assertion for inventory? a. Confirm inventory on consignment. b. Examine receiving reports for inventory, tracing the recorded amounts. c. Observe the taking of physical inventory. d. Vouch inventory purchases to vendor invoices..

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle 78. The auditor may discover that the recorded cost of inventory exceeds the designated market price when testing which assertion?

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle a. Existence. b. Cutoff. c. Valuation. d. Rights.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 79. Which of the following procedures will usually be performed by the auditor to determine if obsolete inventory exists? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in The Acquisition and Payment Cycle 80. A perpetual inventory system is preferable to a periodic system if adequately controlled and maintained because of which of the following? 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 where book inventory is continuously in agreement with inventory on hand within specified time periods. d. It better controls the receipt of goods.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 81. Which of the following is NOT a procedure that the auditor should perform related to the physical inventory count? a. Document the first and last tag numbers used. b. Take notations of all items that appear to be obsolete or are in questionable condition.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle c. Make counts of all items and record the counts for subsequent tracing into the client‘s inventory compilation. d. Observe whether there is any physical movement of goods during the counting of the inventory.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 82. The principle of lower of cost or market and the potential obsolescence of inventory are a concern for the audit team because of which of the following? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.149 - Inventory Complexity STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 83. An auditor reviews purchase contracts to assess the conditions for the return of merchandise as a test related to which management assertion? a. Existence b. Completeness c. Rights and Obligations d. Valuation ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle 84. Which of the following is not an item reviewed by the auditor to test the client’s assertion related to the presentation and disclosure of inventory? a. The inventory valuation methods used. b. The amount of obsolete inventory on hand. c. The existence of contingent losses associated with long-term purchase commitments. d. The classification of inventory as raw material, work in process or finished goods.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle 85. Which of the following is a procedure used in an audit where there is a heightened risk of fraud related to accounts payable and other related expense accounts? a. Send blank confirmations to vendors that ask them to furnish information about all outstanding invoices, payment terms, and payment histories. b. Scan journals for unusual or large year-end transactions and adjustments. c. Obtain and examine documentation for payments of invoices that are for amounts just under the limit that typically requires some level of approval. d. All the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.142 - Fraud STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 86. Auditing the valuation assertion for inventory of a client utilizing the FIFO cost flow assumption will require the auditor to examine which of the following? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 87. When testing a standard cost system, the auditor does not normally 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 allocating variances to inventory and cost of goods sold.

ANSWER: c POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 88. The acquisition cycle begins with which of the following? a. A payment. b. A purchase order. c. A requisition. d. A receiving report.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 89. 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. Unexpected increases in gross margin. d. Capital assets that seem to be growing faster than the business.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.154 - Business Analysis STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 90. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.151 - Test of Inventory STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 91. Which of the following is a condition which would not create a conducive situation for a client to take a physical inventory at an interim date before year end? a. The control risk over inventory is high. b. The auditor will be able to review material transactions in the roll-forward period.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle 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 year-end. d. The auditor reviews the intervening transactions for evidence of any manipulation or unusual activity.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.11-08 - LO: 11-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence in the Acquisition and Payment Cycle 92. Which of the following might an auditor do in testing for the existence of accounts payable? a. Review client’s financial statement disclosure. b. Review long-term purchase commitments. c. Perform a cutoff test of purchases and cash disbursements. d. Perform analytical review of related expense accounts.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.155 - Substantive Tests of Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 93. Acquisition and payment processes What are the five major phases of the acquisition and payment process?

ANSWER: The five phases of the acquisition and payment process are: 1. Requisition for goods or services.

2. Purchase of goods or services according to company policies.

3. Receipt of goods and services.

4. Approval of items for payment.

5. Cash disbursements.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 94. Centralized purchasing List the advantages for implementing a centralized purchasing function. What are the disadvantages (if any)?

ANSWER: The advantages for creating a separate purchasing function include the following: ∙ Promotes efficiency and effectiveness. ∙ Eliminates potential favoritism that could take place if individual Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle ∙ ∙

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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 95. Cost accounting systems When auditing a manufacturing concern, what major inquiries might be made by the auditor about the cost accounting system?

ANSWER: 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 costs. ∙ How recently the standards have been updated.

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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 96. 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.

ANSWER: 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. ∙ Determine whether specialists are needed to identify, test, or assist in correctly identifying inventory items.

POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 97. Physical inventory procedures Discuss the procedures that the audit team will most likely perform upon arrival at each site right before physical inventory is taken. ∙ Obtain a map of the area and a schedule of inventory counts to be made for each area.

ANSWER:

∙ Obtain a list of sequential tag numbers to be used. ∙ Observe the procedures the client has implemented to shut down receipt or shipment of goods. ∙ Observe that the client has shut down production. ∙ Obtain document numbers for the last shipment and receipt of goods before inventory is taken.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 98. 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?

ANSWER: When auditing accounts payable, the auditor may: Reconcile vendor statements or returned confirmations with recorded 1. payables. This yields a higher level of assurance.

Test subsequent disbursements for proper recording as a payable as of 2. either the balance sheet date under audit or in the subsequent period, as appropriate. This yields a moderate level of assurance.

Analytical review of related expense accounts to determine which accounts appear to be understated. This yields a very low level of 3. 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.146 - Testing Accounts Payable STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 99. Physical inventory procedures Discuss the procedures the audit team will most likely perform during the physical observation of inventory.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle ANSWER:

The audit team will observe the counting of inventory and note the following on inventory count working papers. ∙ The first and last tag number used in the section. ∙ All tag numbers and the disposition of all tag numbers in the sequence. ∙ The product identification, product description, units of measure, and number of items on a count sheet. ∙ Items that appear to be obsolete or of questionable value. ∙ All high-dollar-value items included in inventory. ∙ Movement of goods into or out of the company during the process of inventory taking.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 100. 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.

ANSWER: Below are seven audit procedures that may be performed by the audit team for determining obsolete inventory items: Noting potential obsolete inventory when observing the client’s 1. physical inventory.

Calculating inventory turnover, number of days’ sales in inventory, 2. date of last sale or purchase, and other similar analytic techniques to identify potential obsolescence.

Calculating net realizable value for products by referring to current 3. selling prices, cost of disposal, sales commissions, and so on.

Monitoring trade journals and the Internet for information regarding the 4. introduction of competitive products.

Inquiring of management about its approach to identifying and 5. classifying obsolete items.

6. Comparing current sales with budgeted sales.

Adjusting for poor condition of inventory, reported as part of periodic 7. cycle counts.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.147 - Inventory Procedures STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 101. Inventory controls What are some of the important controls that are expected to be included in a well-conceived inventory control system?

ANSWER: A well-conceived inventory control system should ensure the following: All purchases are authorized.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.148 - Inventory Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 102. Comparison of Controls in Traditional and Automated Systems Discuss the differences between a traditional receiving system and an automated integrated receiving system.

ANSWER: Traditional Receiving System ∙ Purchase orders are prepared and sent to vendors. ∙ Purchase orders are based on projected sales or production, or current inventory levels. ∙ Price is either negotiated or competitively bid among a number of vendors. ∙ Independent receiving function exists. ∙ Independent, sequentially numbered receiving documents are prepared. ∙ Accounts payable department matches purchase order, receiving document, and invoice and accrues accounts payable. ∙ Differences between goods received and goods ordered are identified before payments are made.

Automated Integrated Receiving System ∙ Long-term contract is signed with vendor. ∙ Quantities are based on production plans or sales programs. Quantities and delivery times are updated monthly or biweekly depending on scheduling and shipping constraints.

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Chapter 11 - Auditing Inventory, Goods and Services, and Accounts Payable: The Acquisition and Payment Cycle ∙ Price is locked in with a preferred vendor. ∙ Goods are delivered to production line. ∙ Accruals are set up based on contract. ∙ Payments are electronically transferred to vendor based on contractual terms. ∙ Processes are described in the contract to resolve difference between goods received and goods that were shipped by vendor.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.145 - Processes and Controls STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal 1. Long-lived assets only include the tangible assets of an organization. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 2. Long-lived assets typically represent the smallest single category of assets in many organizations. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 3. Much of the inherent risk related to long-lived assets is due to the importance of management estimates. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 4. The auditor’s procedures should include a determination as to whether tangible assets have reasonable useful lives. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 5. Gains on the sale of equipment usually indicate that the depreciation lives of the assets are too long. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal STATE STANDARDS:

United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking

6. To identify any possible impairment of manufacturing equipment, the auditor can tour the facility during operations to determine if any of the machines are idle. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 7. Internal controls over fixed assets should provide reasonable assurance that all purchases are authorized and reasonably valued. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 8. An inherent risk related to asset impairment is management is not typically interested in writing down the asset value. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 9. The client should have methods in place to identify and account for intangible-asset impairments. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical skills United States - AK - AICPA BB-Critical thinking 10. A common technique used to fraudulently misstate financial statements involves the understatement of Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal long-lived assets through undervaluing existing long-lived assets. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - 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 existence of long-lived assets. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 12. The auditor would be most likely review the depreciation policy and test depreciation calculations to satisfy the auditor about the valuation of long-lived assets. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 13. The existence of fair value estimates that are unreasonable or unsupportable is indicative of a potential fraud scheme. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 14. The auditor typically makes a physical inspection of most of the material fixed asset acquisitions. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 15. An auditor is required to gain an overall understanding of internal controls related to long-lived assets for integrated audits, but NOT for financial statement only audits. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 16. Asset impairment is not typically assessed by the independent auditor since it is a subjective management estimate. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 17. Knowledge of industry product trends is crucial to the auditor's identification of the potential for the impairment of assets. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 18. When the value of a long-lived asset has been impaired, the organization must write down the asset reflecting the decline in economic benefit of the asset.

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 19. When an organization disposes of a long-lived asset it should determine and record the gain or loss on the disposal of the asset. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 20. Once the auditor obtains a fixed asset additions schedule from the client, the first audit procedure to perform is to test the existence of recorded additions. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses NOTES: Test the accuracy of the schedule first and trace it to the general ledger to ensure it is valid before testing additions.

21. Effective internal controls over long-lived assets include the use of identification tags secured to assets for proper tracking. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal 22. Estimating the amount of reclamation costs are an inherent risk associated with natural resources. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 23. An inherent risk associated with intangible assets such as a patent is the accounting for research and development costs a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 24. Brown, Inc. obtained a patent for its product five years ago and should expense the entire amount of the unamortized balance if the product is no longer sold. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 25. Limited physical access to long-lived assets is a typical internal control that affects multiple assertions for long-lived assets. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 26. It is not important for an organization to have controls to track the location, quantity, condition, maintenance, and deprecation status of their long-lived assets as the external auditor gathers evidence related to these issues. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 27. Auditors must employ independent geologists to evaluate management’s estimate of the reserves contained in a new discovery of natural resources. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 28. Natural resource companies cannot reassess the amount of reserves even if more information becomes available during the course of mining, harvesting, or extracting resources. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 29. When planning the audit procedures related to long-lived assets, the auditor is required to perform preliminary analytical procedures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 30. Auditors do NOT need to know the business and economics of the business in order to perform meaningful preliminary analytical procedures. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 31. If preliminary analytical procedures identify some unexpected relationships, the auditor would conclude that there may be a heightened risk of material misstatements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-05 - LO: 12-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures to Identify Misstatements Associated with Long-Lived Assets 32. Auditors will perform an analysis of leases using FASB’s Codified Standards (ASC) criteria to substantiate the accounting treatment. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 33. Auditors often recalculate the present value of capital lease agreements to assess whether the relevant criteria for capitalizing the lease have been met. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 34. If unusual or unexpected relationships related to long-lived assets are identified during preliminary analytical procedures, the planned audit procedures (tests of controls, substantive procedures) would be adjusted to address the risk of material misstatement.

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 35. An auditor should compare the unaudited financial statements with both past results and industry trends to gain an indication about the possibility of fraud. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - 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 a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 37. The obsolescence of long-lived assets is an inherent risk that should be considered by the auditor. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-02 - LO: 12-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Performing Risk Assessment Procedures for Long-Lived Assets 38. Changes in the depreciable lives of equipment may be identified through a substantive audit procedure that includes analyzing depreciation expense as a percent of assets. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 39. Audit firms should NOT customize the audit programs based on the assessment of the risk of material misstatement when auditing long-lived assets. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.158 - Responding to Identified Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 40. If a company has only a few long-lived assets of relatively high value, the most efficient approach for an auditor would be to use tests of details for obtaining evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.158 - Responding to Identified Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 41. The risk of material misstatement related to the existence of long-lived assets at Client A is considered low, while this risk at Client B is considered high. Sufficiency of evidence for testing the existence of equipment would be higher for client B. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.158 - Responding to Identified Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 42. An inherent risk related to long-lived assets is the incomplete recording of disposals. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal STATE STANDARDS:

United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking

43. For integrated audits, the auditor will test the operating effectiveness of important controls as of the client’s year end. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 44. The auditor selects entity-wide controls for testing, but NOT transaction controls specific to long-lived assets. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 45. If control deficiencies related to long-lived assets are identified, the auditor will automatically assess those deficiencies as significant deficiencies. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 46. Which one of the following factors is not an inherent risk associated with long-lived assets? a. Obsolescence of assets. b. Impairment of assets. c. Incomplete recording of disposals. d. Lack of physical controls over the long-lived assets.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal 47. Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. Obtaining knowledge of the client business. b. Reviewing the business plan related to major acquisitions. c. Reviewing the minutes of board of directors’ meetings. d. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 48. Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased. Which of the following would be of greatest concern to the auditor? a. Inappropriate book value of new equipment. b. Impaired value of new equipment. c. Impaired value of old equipment. d. Inappropriate depreciation calculation for new equipment.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 49. Which of the following factors is not an inherent risk factor related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, goods controls, and professional judgment. d. All of the above are inherent risk factors.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 50. The tour of the manufacturing plant may best assist the auditor in determining which of the following? a. Whether all purchases are authorized. b. Whether any machinery is inoperative in the production cycle. c. Management's strategy for assessing impairment.

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal d. Estimates of depreciation expense.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 51. Which one of the following is not a management assertion relevant to long-lived assets? a. Existence. b. Completeness. c. Valuation. d. Reporting.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 52. Which of the following statement is true? a. Intangible assets should be recorded at fair market value. b. Intangible assets should be recorded at cost. c. Intangible assets should be recorded at future market value. d. Intangible assets should not be recorded.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 53. Which of the following is not a circumstance indicating potential impairment of intangible assets? a. A change in circumstances, such as the legal environment or business climate that could affect the asset’s value. b. An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset. c. The asset generates just as much cash flow as in the past. d. Losses or projections indicating continuing losses associated with an asset used to generate revenue.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 54. Which of the following expense accounts is associated with intangible assets with a definite life?

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal a. Depletion expense. b. Depreciation expense. c. Amortization expense. d. None of the above.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 55. Which of the following expense accounts is associated with natural resources? ? a. Depreciation expense. b. Amortization expense. c. Depletion expense. d. Capitalization expense.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 56. Which of the following long-lived assets presents the most difficult in determining its cost? a. Equipment. b. Inventory. c. Patent. d. All the above are equally difficult in determining cost.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 57. Which of the following actions is not a potential fraud scheme related to long-lived assets? a. Impairment losses on long-lived assets are not recognized. b. Costs that should have been expenses are improperly capitalized. c. Amortization of intangible assets is miscalculated. d. All the above are potential fraud schemes.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal 58. Which statement is true? a. Management is always reluctant to write down asset values. b. Intangible assets do not require effective controls because they have low inherent risk. c. Complex ownership structures may create challenges in the recording of assets. d. The incomplete recording of asset disposals understates the asset balance.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-02 - LO: 12-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risk of Misstatement Associated with Long-Lived Assets 59. Which of the following controls is not a typical control that affects multiple assertions for long-lived assets? a. Reviewing insurance policies for adequate replacement coverage of assets. b. Formal budgeting process with appropriate follow-up variance analysis. c. Periodic comparison of physical assets to subsidiary records with the general ledger. d. Periodic reconciliations of subsidiary records with the general ledger.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-04 - LO: 12-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Control Risks Associated with Long-Lived Assets 60. Which of the following controls related to management’s asset impairment judgments does the auditor need to understand? a. A systematic process to identify assets that are not currently in use. b. Projections of future cash flows that is based on management’s strategic plans and economic conditions. c. Systematic development of current market values of similar assets prepared by the client. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 61. For intangible assets, controls should be designed to do which of the following? a. Identify and account for intangible asset impairments.

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset. c. Provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. d. All of the above.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 62. Which of the following is not a technique that auditors can use when performing preliminary analytical procedures related to long-lived assets? a. Perform an overall estimate of depreciation expense. b. Review and analyze gains/losses on disposals of equipment. c. Compare depreciable lives used by the client for various asset categories with those of the industry. d. All the above are techniques that auditors can use.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 63. Which of the following information should be included in management’s documentation regarding intangible assets? a. Manner of acquisition. b. Basis for the capitalized amount c. Expected period of benefit. d. All the above should be included.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 64. When performing preliminary analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B. ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 65. An auditor’s review of the repair expense to identify any capital expenditures is a test related to which management assertion? a. Existence b. Completion c. Valuation d. Rights and Obligation ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 66. Audit procedures should be proportional to which of the following? a. Size of the client. b. Size of the firm. c. The assessed risks. d. The assessed misstatements.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.159 - Responding to Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 67. Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment? a. Valuation. b. Cutoff. c. Existence. d. Rights.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 68. If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal tested? a. Completeness. b. Rights and Obligations. c. Existence. d. Valuation ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosure, and Assertions for Long-Lived Assets and Related Expenses 69. Which of the following is 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? a. Asset depreciation. b. Asset amortization. c. Asset impairment. d. Asset disposal.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 70. In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets? a. Completeness. b. Existence. c. Rights. d. Presentation and disclosure.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 71. The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit steps primarily tests which of the following assertions for the equipment account? a. Existence. b. Presentation and disclosure.

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal c. Rights. d. Valuation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 72. Which one of the following does not constitute a probable relationship between accounts? a. Equipment and depreciation. b. Patent and amortization. c. Assets under capital leases and amortization. d. Oil reserves and depreciation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.157 - Preliminary Analytical Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 73. Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? a. Completeness. b. Rights and Obligations. c. Existence. d. Valuation ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 74. If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested? a. Existence. b. Completeness. c. Presentation and Disclosure. d. Rights and Obligations.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal 75. A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use, stewardship, and management of equipment. Which of the following is not a test that could be used in testing the control? a. Inquiry. b. Observation. c. Inspection of documentation. d. Review financial statements.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 76. The auditor performs substantive procedures related to property, plant and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing? a. Valuation. b. Rights. c. Completeness. d. Existence.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 77. Which of the following assertions are usually the two most relevant assertions related to long-lived assets? a. Existence and Presentation. b. Completeness and Existence. c. Existence and Valuation. d. Valuation and Completeness.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 78. If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period, what is the primary assertion being tested? a. Presentation and Disclosure.

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal b. Existence. c. Completeness. d. Valuation.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 79. Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets? a. Make client inquiries. b. Examine property tax records. c. Send confirmations to insurance agents. d. Examine scrap sales accounts.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 80. Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion? a. Assess management’s impairment estimates. b. Examine documents of title. c. Recalculate amortization expense. d. Inquire management about assets that are idle.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 81. As natural resources are used up the client has to recognize which of the following types of expense? a. Depreciation expense. b. Depletion expense. c. Amortization expense. d. Reclamation expense.

ANSWER: b Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 82. After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the land to its original condition. What is the cost of this restoration called? a. Impairment expense. b. Depletion expense. c. Amortization expense. d. Reclamation expense.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-02 - LO: 12-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risks Associated with Long-Lived Assets 83. Which of the following items is not used by natural resource companies to estimate the asset value of natural resources over the life of the resource, e.g., oil or coal? a. Reserves. b. Depletion rate. c. Reclamation expense. d. Restoration rate ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-02 - LO: 12-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Identify and Assess Inherent Risks Associated with Long-Lived Assets 84. Which of the following procedures is not a substantive procedure used for testing the valuation of long-lived assets? a. Assess management’s impairment estimates. b. Inquire of management about assets that are idle. c. Develop an independent estimate of amortization expense. d. All of the above are procedures used for testing the valuation assertion.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal STATE STANDARDS:

United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking

85. Which of the following controls is not a typical internal control over fixed assets? a. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 86. Which of the following controls is not a typical internal control over intangible assets? a. Procedures to provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. b. Development of amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. Procedures to identify and account for intangible asset impairment. d. All of the above are typical controls for intangible assets.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 87. Which of the following are not included in a fixed-asset ledger? a. List of all the assets. b. Estimated useful life. c. Salvage value. d. All the above are included.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 88. Which statement is true about a company’s choice of capitalization policy? a. All assets with a useful life of more than one year must be capitalized. b. The company’s policy must meet the minimum capitalization amounts established by GAAP. c. The company’s policy is determined relative to materiality and the cost of maintaining asset records. d. The company may elect to capitalize operating expenses which exceed the minimum threshold for Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal asset capitalization.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.12-08 - LO: 12-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking TOPICS: Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions for Long-Lived Assets and Related Expenses 89. Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors? a. Physically inspect tangible assets, including major additions, and agree serial numbers with invoices or other supporting documents. b. Use the work of a specialist for asset valuations, including impairments. c. Confirm the terms of significant additions of property or intangibles with other parties involved in the transaction. d. All of the above are fraud-related audit procedures.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 90. If no control deficiencies are identified, how will the extent of substantive testing required differ from a setting where deficiencies in internal control were identified? a. The extent of testing will be more. b. The extent of testing will be less. c. The extent of testing will be the same in the two settings. d. The extent of testing is not affect by control deficiencies.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.137 - Tests of Controls STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AICPA BB-Critical thinking 91. Repairs and maintenance Assume that an auditor determines that a client’s policy related to recording repairs and maintenance is reasonable, but the auditor has concerns about whether the policy is adhered to. What might cause such concerns and how will the auditor adjust the substantive procedures to be performed?

ANSWER: Some clients might be motivated to record some asset purchases as an expense in order to reduce taxable income. Management might attempt to not comply with the policy because of incentive to manipulate reported earnings, for example, decrease Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal reported earnings in a good period and vice versa in a poor period. These incentives might arise because of compensation plans.

If the auditor perceives that such risks are applicable to a particular client, the auditor will adjust the procedures, usually by requesting that the client prepare a schedule of both fixed-asset additions and repair and maintenance expense transactions. Selected transactions from both schedules can be vouched to vendor invoices, work orders, or other supporting evidence to determine their proper classification.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.159 - Responding to Risks of Material Misstatement STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 92. Relevant assertions for long-lived assets List the five management assertions relevant for long-lived assets and explain how each one is relevant.

A. Existence or occurrence- The long-lived assets exist at the balance sheet date. The ANSWER:

focus is typically on additions during the year.

B. Completeness- Long-lived asset account balances include all relevant transactions that have taken place during the period.

C. Rights and obligations- The organization has ownership rights for the long-lived assets as of the balance sheet date.

D. Valuation or allocation- The recorded balances reflect the balances in accordance with GAAP. E. Presentation and disclosure- The long-lived asset balance is reflected on the balance sheet in the noncurrent section. The disclosures for depreciation methods and capital lease terms are adequate.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.156 - Significant Accounts, Disclosures, and Relevant Assertions STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 93. Audit approach for leases Describe the substantive procedures typically used to test leases.

ANSWER: General substantive procedures for leases include: • Obtain copies of lease agreements, read the agreements, and develop a schedule of lease expenditures.

• Review the lease expense account, select entries to the account, and determine if there are entries that are not covered by the leases obtained from the client. Determine if the expenses are properly accounted for.

• Review the relevant criteria from the FASB’s codified standards (ASC) to determine which leases meet the requirement of capital leases.

• For all capital leases, determine that the assets and lease obligations are recorded at their present value. Determine the economic life of the asset. Calculate amortization expense and interest expenses, and determine any adjustments to correct the financial statements.

• Develop a schedule of all future lease obligations or determine whether the client’s schedule is correct by referring to underlying lease agreements.

• Review the client’s disclosure of lease obligations to determine that it is in accordance Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal with GAAP.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.136 - Substantive Audit Procedures STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 94. Fraud Risks List potential fraud schemes related to long-lived assets. ∙ Overstatement of assets through overvaluing existing assets.

ANSWER:

∙ Sales of assets are not recorded, and proceeds are misappropriated. ∙ Assets that have been sold are not removed from the books. ∙ Inappropriate residual values or lives are assigned to the assets, resulting in miscalculation of depreciation. ∙ Amortization of intangible assets is miscalculated. ∙ Costs that should have been expenses are improperly capitalized. ∙ Impairment losses on long-lived assets are not recognized. ∙ Fair value estimates are unreasonable or unsupportable.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.138 - Fraud Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 95. Control Risks What are some typical controls that affect multiple assertions for long-lived assets? ∙ Formal budgeting process with appropriate follow-up variance analysis.

ANSWER:

∙ Written policies for acquisition and disposals of long-lived assets, including required approvals. ∙ Limited physical access to assets, where appropriate. ∙ Periodic comparison of physical assets to subsidiary records. ∙ Periodic reconciliations of subsidiary records with the general ledger.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 96. Asset impairment Describe what is meant by asset impairment and explain where inherent risks related to asset impairment stems from.

ANSWER: 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. ∙ Normally, management is not interested in identifying and writing down assets. ∙ Sometimes, management wants to write down every potentially impaired asset to a Cengage Learning Testing, Powered by Cognero

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Chapter 12 - Auditing Long-Lived Assets: Acquisition, Use, Impairment, and Disposal minimum realizable value. ∙ Determining asset impairment, especially for intangible assets, requires a good information system, a systematic process, good controls, and professional judgment.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.135 - Inherent Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking 97. Intangible assets - patents Define what is meant by the term intangible asset, provide an example and identify typical controls over intangible assets.

ANSWER: An intangible asset is one that lacks physical substance, such as patents. ∙ Management authorizations are required for intangible asset transactions. ∙ Documentation regarding intangible assets should be maintained, and such documentation should include: o Manner of acquisition (for example, purchased, developed internally) o Basis for the capitalized amount o Expected period of benefit o Amortization method o Amortization periods and calculations should be approved and periodically reviewed by appropriate personnel.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.134 - Control Risks STATE STANDARDS: United States - AK - AACSB-Analytical risks United States - AK - AACSB-Communication skills United States - AK - AICPA BB-Critical thinking

Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 1. Valuation is a relevant assertion when auditing premiums or discounts on bonds. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 2. The potential dilutive effect of convertible debt or preferred stock, stock options, and warrants should be disclosed in accordance with relevant accounting guidance in computing primary and fully diluted earnings per share. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 3. Relevant accounts when auditing stockholders’ equity include leasehold improvements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 4. Bonds are issued to finance major expansions or to refinance existing debt. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 5. The auditor is primarily concerned with overstatement when auditing bonds. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 6. An organization typically has many debt transactions during the year, with each individual transaction being material. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 7. A bond premium/discount amortization spreadsheet can be used to help assure that the bond is appropriately valued and disclosed in the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 8. Typically, the most relevant assertion related to debt obligations is existence. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 9. Inherent risks related to debt obligations primarily concern the authorization of debt, receipt of funds, recording debt transactions, and compliance with any debt covenants. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 10. Existence is the most relevant assertion associated with an inherent risk for treasury stock transactions recorded in the wrong period. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 11. Valuation is the most relevant assertion associated with an inherent risk for the cost of treasury stock that is subsequently retired and not properly allocated among the appropriate accounts. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 12. When an auditor is investigating the inherent risk associated with stock issuances/sales that are recorded in the wrong period, the auditor is most likely assessing the risks of material misstatements associated with the existence assertion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Inherent Risks Associated with Debt and Equity

13. Presentation and disclosure is the most relevant audit assertion associated with the inherent risk of using inaccurate periods of service for stock options. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 14. Completeness is the most relevant assertion associated with an inherent risk for dividends that are recorded and paid before being declared. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 15. Rights/obligations is the most relevant audit assertion associated with an inherent risk for finding stock options or warrants being granted without being properly approved. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 16. A potential fraud risk associated with debt obligations is the intentional misclassification of short-term debt as long-term debt. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 17. If an auditor discovers that a company intentionally applied loan payments to interest rather than principal, this would result in fraudulent overstatement of income. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 18. As part of brainstorming activities, the auditor might identify possible fraudulent transactions related to stockholders’ equity accounts that are the result of charging expenses directly to retained earnings rather than to the appropriate expense accounts. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 19. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level only. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 20. Once the auditor has obtained an understanding of the inherent and fraud risks of material misstatement associated with debt obligations and stockholders’ equity transactions, the auditor needs to understand the controls that the client has designed and implemented to address those risks. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 21. A typical control for stockholders’ equity transactions is for the board of directors to approve all stock transactions (including options and warrants). a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 22. When identifying and assessing control risks of material misstatement associated with debt obligations and stockholders’ equity transactions, documentation is only required for integrated audits, not financial statement only audits. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 23. Normally, an auditor can gain an understanding of internal controls by means of a walkthrough of the process, inquiry, observation, and review of the client’s documentation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 24. When documenting controls, the auditor can provide this documentation in various formats including a control matrix, a control risk assessment questionnaire, and/or a memo. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 25. When planning the audit related to stockholders’ equity transactions, the auditor is not required to perform preliminary analytical procedures. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 26. Trend analyses are typically used as preliminary analytical procedures related to debt obligations. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 27. If preliminary analytical procedures do not identify any unexpected relationships related to debt obligations, the auditor would conclude that there is not a heightened risk of material misstatements in these accounts. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 28. If there were unusual or unexpected relationships, the planned audit procedures (tests of controls, substantive procedures) would be adjusted to address the potential material misstatements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 29. When planning the audit related to debt obligations, the auditor should not have expectations as to the nature and magnitude of any account balance changes because they might bias the outcome of the audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 30. Typically, when determining the appropriate audit procedures to perform for debt accounts, the auditor will usually decide to test debt obligations, including interest, using only substantive procedures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity 31. Using substantive procedures to test debt obligations is most appropriate because there are a relatively large number of transactions involving immaterial dollar amounts. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Responding to Material Misstatement Risks for Debt and Equity

32. A substantive approach using only tests of controls is most commonly used to audit equity accounts. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity 33. For both debt accounts and stockholders’ equity accounts, the boxes of evidence would typically be filled only with evidence obtained through substantive procedures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity 34. When obtaining evidence about internal control operating effectiveness, the auditor will select only entitywide controls for testing. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 35. For integrated audits, a typical test of controls may include an inquiry of personnel performing the control. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Tests of Controls for Debt and Equity

36. For financial statement audit purposes, when auditing debt obligations and stockholders’ equity transactions, the auditor will most likely perform a substantive audit, and therefore will not perform tests of controls for the debt and equity accounts. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 37. If the auditor identifies control deficiencies, the auditor will not need to judge the severity of the deficiencies but instead would consult management about the need for a fraud audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 38. Confirmations are not substantive procedure designed to obtain evidence on the completeness of debt obligations. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 39. Stockholders’ equity accounts will be tested with only substantive analytical procedures. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 40. The transactions in the stockholders’ equity accounts are typically tested using a statistical sampling approach. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 41. If interest expense recorded by the client is significantly lower than the auditor’s expectation, it may mean that interest payments have not been properly recorded, possibly having been charged to principal. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 42. When performing a substantive analytical procedure related to interest expense, the auditor will likely not test the client’s internal controls. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 43. A starting point for substantive tests of details on debt obligations is to have the client provide a cash flow statement. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 44. For additions to debt, the auditor traces the proceeds into the cash receipts records and the bank statement. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 45. To determine whether notes have been paid in full, the auditor would obtain the most appropriate evidence by examining the board of directors meeting minutes. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 46. As a starting point for testing capital stock and equity transactions, the auditor should review a copy of the client’s articles of incorporation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 47. When auditing debt and equity transactions, the auditor should be skeptical, and therefore alert to the possibility, that management is managing earnings by not appropriately recording expenses, such as charging expenses directly to retained earnings or under-recording interest expense.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 48. If the auditor identifies a risk of material misstatement due to fraud related to debt obligations or stockholders’ equity accounts, the auditor needs to determine the appropriate responses, potentially including changing the nature, timing, and extent of audit procedures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 49. Which of the following is the auditor’s primary objective when auditing debt obligations? a. Understatement of the debt obligation focusing on the completeness assertion. b. Proper valuation of bond premiums or bond discounts, including amortization valuation. c. Valuation of gains or losses on refinancing debt. d. Proper presentation and disclosure, including important restrictions contained in the debt obligations.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 50. Which of the following is not typically included in the audit of debt obligations? a. Interest expense. b. Interest income. c. Notes payable. d. Bonds payable.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 51. How are most bonds marketed? a. Through the board of directors. b. Through an underwriter. c. Through auditors. d. Through employees.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 52. Which of the following statements about bonds is false? a. They may be issued to finance major expansions. b. They may be issued to refinance existing debt. c. They account for many of the organization’s transactions. d. They are generally highly material to the financial statements.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 53. Which assertion is generally the most relevant when auditing the restrictions contained in debt obligations? a. Completeness. b. Valuation. c. Proper presentation and disclosure. d. Existence.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 54. Which of the following is not a common debt covenant restriction?

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions a. Maintenance of a minimum level of retained earnings before dividends can be paid. b. Maintenance of a minimum working-capital ratio. c. Specification of a maximum debt-equity ratio. d. Specification of a minimum earnings per share.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 55. Which of the following is not a relevant account when auditing stockholders’ equity? a. Treasury stock. b. Dividends. c. Sinking fund for plant expansion. d. Retained earnings.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 56. Which of the following is not a common transaction affecting stockholders’ equity? a. The purchase of treasury stock. b. The declaration and payment of dividends. c. The exercises and expirations of stock options and warrants. d. Bond amortization.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 57. Which of the following results in a situation where an auditor has the least amount of difficulty in determining stock valuation? a. When stock is issued for land. b. When stock is exchanged for another business. c. When stock options are issued and exercises occur. d. When stock is issued for cash.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 58. How would an auditor generally measure the value of a stock option expense? a. Fair value. b. Appraised value c. By computing a weighted average value of all classes of stock authorized. d. All of these methods can be used.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 59. In auditing equity accounts, the auditor primarily focuses on which of the following two assertions? a. Valuation and completeness. b. Valuation and existence. c. Presentation and disclosure and valuation. d. Presentation and disclosure and completeness.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 60. When auditing the gains or losses on refinancing debt, the auditor primarily focuses on which assertion? a. Completeness. b. Existence. c. Valuation. d. Presentation and disclosure.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions TOPICS:

Auditing Debt and Equity Transactions

61. When auditing the premium or discount on bonds (including amortization), the auditor primarily focuses on which assertion? a. Existence. b. Completeness. c. Presentation and disclosure d. Valuation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 62. Which of the following would a bond indenture not provide information about? a. The time period before repayment. b. Whether the bond is convertible. c. Whether the bond is callable. d. The date the bond will be called.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 63. Which of the following would not typically be included as part of the balance sheet disclosures related to stockholders’ equity? a. Accumulated other comprehensive income b. Details on stock repurchases c. Price/earnings ratios for stock d. Prior period adjustments to retained earnings ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-01 - LO: 13-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Auditing Debt and Equity Transactions 64. Which of the following is not an inherent risk typically associated with the existence of dividends? a. Dividends are recorded in the wrong period.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions b. Dividends are recorded before declared. c. Dividends are not properly amortized. d. Dividends have not been approved before being declared.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 65. Which of the following is not an inherent risk typically associated with debt covenant compliance issues? a. Whether debt covenants are calculated accurately. b. Whether debt payment transactions are properly initiated. c. Whether compliance with debt covenants is appropriately disclosed. d. Whether compliance with debt covenants is appropriately reviewed.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 66. Which of the following is not an inherent risk typically associated with recording debt transactions? a. Interest expense not being properly recorded. b. Failure to accrue interest expense. c. Debt not being properly classified. d. Debt not being properly authorized.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 67. The inherent risk of proceeds from stock sales not being received is most likely related to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 68. An auditor determines that there is an inherent risk that all stock repurchased is not recorded as treasury stock. This determination is most likely tied to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 69. An auditor determines that there is an inherent risk that dividends may be recorded and paid before being declared. This determination is most likely tied to which of the following management assertions? a. Completeness. b. Presentation and disclosure. c. Valuation. d. Existence.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 70. An auditor determines that there is an inherent risk that a company has not included both the basic earnings per share and diluted earnings per share amounts in financial statements even though significant dilutive securities are part of the company’s complex capital structure. This determination is most likely tied to which of the following management assertions? a. Valuation. b. Presentation and disclosure. c. Rights and obligations. d. Existence.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 71. An auditor determines that there is an inherent risk that stock options exercised or expired remain on the organization’s books. This determination is most likely tied to which of the following management assertions? a. Valuation. b. Presentation and disclosure. c. Rights and obligations. d. Existence.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity 72. Which of the following is not a potential fraud related to debt obligations? a. Long-term or short-term debt is misclassified. b. Entire loan payments are charged to either principal or interest. c. Dividends are paid in violation of restrictive covenants. d. Debt obligations are not properly authorized.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 73. Which of the following is not a potential fraud related to stockholders’ equity accounts? a. Stock sales or issuances are not authorized. b. Entire loan payments are charged to either principal or interest. c. Dividends are paid in violation of restrictive covenants. d. Stock options are back-dated.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 74. What type of risk is intentional failure by management to accurately disclose violations of debt covenants? a. Inherent risk b. Fraud risk c. Control risk d. Detection risk.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 75. Which of the following statements is true regarding the identification and assessment of the risks of material misstatements by the auditor? a. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the financial statement level. b. Auditing standards require the auditor to identify and assess the risks of material misstatement due to fraud at the assertion level. c. As part of brainstorming activities, the auditor should identify possible frauds that could occur. d. All of these statements are true.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-03 - LO: 13-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Fraud Risk Associated with Debt and Equity 76. Which of the following would an auditor not typically perform as part of gaining an understanding of the client’s controls related to debt obligations? a. Review policies related to approval required for new debt. b. Inquire of management about the process for reviewing compliance with debt covenants. c. Review the client’s documentation of controls. d. Recalculate interest expense.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 77. In general, which of the following would an auditor not typically perform as part of gaining an understanding of the client’s controls?

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions a. A walkthrough of the process. b. Inquiry. c. Observation. d. All of these are used to gain an understanding of the controls.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 78. Which of the following does an auditor consider when gaining an overall understanding of the client’s internal controls? a. Entity-wide controls at the account level only. b. Transaction controls at the account level only. c. Entity-wide controls at the assertion level only. d. Both entity-wide controls and transaction controls at the account and assertion levels.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 79. Which of the following would the auditor consider as part of the control environment related to debt obligations? a. Inquiry of trustee regarding the registration of current bondholders and distribution of interest payments. b. Recalculation of the underwriter’s commission. c. Independence of the board of directors with respect to long-term financing. d. Inspection of documentation to confirm refinancing of debt.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 80. Which of the following are entity-wide components of internal control that can mitigate the risk material misstatement related to debt obligations? a. Risk assessment. b. Information and communication.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions c. Monitoring controls. d. All of these are entity-wide components of internal control.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 81. Which of the following is a typical control for debt obligations? a. The board of directors approves all new debt. b. The stockholders approve all new debt. c. The CFO approves all new debt. d. Upper managers approve all new debt.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 82. Which of the following statements is typically not true regarding controls related to proper accounting for stock option grants? a. The proper accounting for stock option grants is researched by the organization’s accountant. b. The analysis of the accountant regarding stock option grants is reviewed by the CFO. c. The analysis of the accountant regarding stock option grants is reviewed by the organization’s legal counsel. d. The analysis of the accountant regarding stock option grants is reviewed by the board of directors.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 83. Which of the following statements is true regarding preliminary analytical procedures for debt obligations and stockholders’ equity transactions? a. Trend analysis would not typically be performed for debt obligations. b. The long-term debt to equity ratio could be considered by the auditor as part of the preliminary analytical procedures. c. Because there are typically only a few stockholders’ equity transactions, the auditor is not required to perform preliminary analytical procedures for stockholders’ equity accounts.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions d. If unusual or unexpected relationships are identified by preliminary analytical procedures, the auditor should stick with the original expectations of misstatements, because this could be an anomaly and bias the audit overall.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 84. Which of the following is not an example of typical analytical procedures related to debt obligations? a. Perform a trend analysis of the balances in notes payable, interest expense, and accrued interest with prior periods, considering known client activities related to debt. b. Calculate the total debt-to-equity ratio and perform a trend analysis with prior periods. c. Calculate the times interest earned ratio and perform a trend analysis with prior periods. d. Calculate the current ratio and perform a trend analysis with prior periods.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 85. Which of the following is not true regarding preliminary analytical procedures performed by the auditor when planning the audit? a. The primary preliminary analytical procedure for stockholders’ equity accounts is a comparison of current year account balances with prior year account balances. b. If there are unusual or unexpected relationships, the planned audit procedures would be adjusted to address the potential material misstatements. c. The auditor should have an expectation as to the nature and magnitude of any account balance changes. d. Auditors show focus on just the numbers when performing analytical procedures.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-05 - LO: 13-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Preliminary Analytical Procedures for Debt and Equity 86. Which of the following statements is true regarding the appropriate audit procedures to perform for debt and stockholder’s equity accounts? a. The auditor will usually decide to test debt obligations, including interest, using only substantive procedures.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions b. Testing debt obligations, including interest, is typically accomplished using only control procedures. c. When auditing stockholders’ equity transactions, the auditor commonly uses a control procedure approach, but uses only substantive procedures to test debt obligation transactions. d. None of these statements is true.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity 87. Which of the following is not true about auditing stockholders’ equity transactions? a. The auditor usually uses a substantive approach. b. The number of equity transactions with outside parties is usually small. c. The dollar amount is usually immaterial. d. An approach using only tests of details is most commonly used to audit equity accounts.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity 88. For integrated audits, when does the auditor test the operating effectiveness of important controls? a. As of the beginning of the client’s fiscal year. b. As of the client’s year end. c. As of the end of the second quarter of the client’s fiscal year. d. None of these answers is correct.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 89. Which of the following is not true regarding appropriate tests of controls? a. The auditor selects controls that are important to the auditor’s conclusion about whether the organization’s controls adequately address the assessed risk of material misstatement for the relevant debt and equity accounts. b. The client’s audit committee selects controls that are important to the auditor’s conclusion about whether the organization’s controls adequately address the assessed risk of material misstatement for the relevant debt and equity accounts.as of the client’s year end.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions c. The auditor will select both entity-wide and transaction controls for testing. d. If the auditor wants to rely on controls for the financial statement audit, the auditor would test the operating effectiveness of those controls throughout the year.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 90. If tests of controls result in identified control deficiencies, how will the auditor assess those deficiencies? a. By estimating interest expense based on average interest rates and average debt outstanding. b. By comparing current year account balances with prior year account balances. c. By determining their severity and the impact on the opinion of internal control effectiveness. d. By calculating the long-term debt-to-equity ratio and performing a trend analysis with prior periods.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 91. Which of the following is not a typical test of controls when auditing debt and equity transactions? a. Inquiry of personnel performing the control. b. Comparing current year account balances with prior year account balances. c. Observation of the control being performed. d. Reperformance of the control by the auditor testing the control.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-07 - LO: 13-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Tests of Controls for Debt and Equity 92. Which of the following procedures would be included in the auditor’s audit program for long-term debt? a. Investigation of credits to the bond interest income account. b. Inspection of the accounts payable master file. c. Verification of the existence of the bondholders. d. Review debt loan agreements.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 93. Which of the following is not true regarding the testing of transactions in the stockholders’ equity accounts? a. The transactions are typically tested on a 100% basis. b. The transactions are typically tested on a sampling basis. c. The number of transactions is typically small. d. Most of these transactions are highly material.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 94. When auditing debt obligations, which of the following is the primary substantive analytical procedure? a. Reading loan agreements. b. Developing an independent expectation of interest expense. c. Tracing bond proceeds to cash receipts. d. Confirming transactions with outside parties.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 95. Which of the following is the least important in helping the auditor develop an independent expectation of interest expense as a substantive analytical procedure? a. Determine average interest rates. b. Determine average debt outstanding. c. Examine disaggregated data by type of debt. d. Examine an interest revenue schedule.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 96. Which of the following will an auditor not perform when looking for additions to debt? a. Trace the proceeds into the cash receipts records. b. Examine canceled notes. c. Obtain assurance regarding board approval of the debt through review of board meeting minutes d. Trace the proceeds into the bank statement.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 97. Which of the following will an auditor not perform when looking for debt reductions? a. Examine proceeds into the cash receipts records. b. Examine canceled checks. c. Examine payments through the cash disbursements records. d. Examine canceled notes.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 98. Which of the following procedures is a typical substantive procedure related to the relevant assertion of completeness for debt obligations? a. Recalculating accrued interest. b. Reviewing debt agreements for the restrictive covenants. c. Using analytical procedures to analyze interest expense. d. Confirming debt obligations with relevant outside parties.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 99. Which of the following procedures is a typical substantive procedure related to the relevant assertion of valuation and allocation for debt obligations? a. Determine the related parties resulting from debt transactions. b. Reviewing debt agreements for the restrictive covenants. c. Recalculating accrued interest.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions d. Confirming debt obligations with relevant outside parties.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 100. Which of the following is a typical substantive procedure related to the relevant assertion of presentation and disclosure for debt obligations? a. Vouching additions and deletions to debt obligations. b. Reviewing debt agreements for the restrictive covenants. c. Recalculating accrued interest. d. Confirming debt obligations with relevant outside parties.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 101. If the auditor determines that the client’s current ratio is below a particular covenant level, which of the following would the auditor not do? a. Assess the effects of the violation. b. Assume that the debt will need to be reclassified, if the violation is not waived. c. Consider that the debt will be due and payable, if the violation is not waived. d. Issue an adverse audit opinion.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 102. As a starting point for testing capital stock and equity transactions, which of the following should the auditor perform? a. Trace the proceeds of stock sold to the cash receipts journal. b. Review the minutes of the board of directors meetings. c. Examine documentation maintained by the transfer agent. d. Review a copy of the client’s articles of incorporation.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 103. For those clients with treasury stock, which of the following would the auditor be least likely to perform? a. Obtaining confirmations from the stock transfer agent. b. Tracing transactions through the cash receipts journal. c. Tracing transactions through the cash disbursements journal. d. Reviewing a copy of the client’s articles of incorporation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 104. In its 2004 through 2006 inspections, which of the following was not a deficiency the PCAOB noted related to inadequate testing of stockholders’ equity transactions? a. The auditors failed to properly address and evaluate the substance, business purpose, or significant terms of the equity arrangements. b. The auditors failed to consider the accounting principles potentially applicable to the equity transactions. c. The auditors failed to evaluate whether the audit clients had appropriately determined the fair values assigned to equity-based transactions and to test the reasonableness of such fair values. d. The auditors failed to disclose each class of stock issued by the clients.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 105. Which of the following is not a substantive test of details for dividends? a. Calculation of the dividend payout ratio. b. Examination of the minutes of the board of directors meetings for authorization of the dividend per share amount. c. Examination of the minutes of the board of directors meetings for the dividend record date. d. Agreement of the dividend amount with the payment in the cash disbursements journal.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 106. If the auditor wants to obtain evidence as to whether the dividend payment was made to the stockholders who owned the stock as of the dividend record date, which of the following would the auditor do? a. Recalculate the dividends per share. b. Examine the minutes of the board of directors meetings for authorization. c. Trace the payee’s name on the canceled check to the dividend records. d. Determine that dividend restrictions are adequately disclosed in the financial statements.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 107. Which of the following is not true regarding restrictions on dividend payments? a. These restrictions typically arise when loan agreements prohibit the registrant from paying cash dividends without the consent of the lender. b. In certain cases, restrictions at a subsidiary-company level exist such that the registrant’s subsidiary companies may not transfer amounts to the registrant without the consent of a third party. c. Amounts subject to restrictions must be disclosed. d. The auditor will typically confirm with shareholders whether there are any side agreements regarding dividend restrictions.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 108. In those audits where there is a heightened risk of fraud related to debt obligations, which of the following will the auditor not typically perform? a. Search public records to identify debt obligations. b. Vouch and trace loan proceeds and debt payments. c. Send confirmations to lenders and creditors, including confirmation of compliance with any debt covenants. d. Obtain photocopies of supporting documents.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 109. In those audits where there is a heightened risk of fraud related to stockholders’ equity accounts, which of the following will the auditor typically not perform? a. Confirm terms of equity arrangements and shares held directly with shareholders. b. Account for and vouch all proceeds from stock issues. c. Confirm with shareholders whether there are any side agreements. d. Review equity authorizations in the board meeting minutes.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 110. Which of the following is not important documentation for substantive procedures for debt obligations? a. Copies of the debt agreements. b. The client’s articles of incorporation. c. A summary of the calculations supporting the compliance debt covenance. d. Identification of the specific items tested.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 111. Which of the following is not important documentation for substantive procedures for capital stock and equity transactions? a. Confirmations with transfer agent or shareholders. b. The client’s articles of incorporation. c. A summary of the changes in equity accounts. d. A memo regarding audit ideas generated during the brainstorming session regarding potential frauds applicable to the capital stock and equity transactions.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 112. Why are audits of most stock issuance usually considered to be relatively straightforward? a. The number of transactions is small. b. The transactions are typically material. c. Most stock is issued for cash. d. There are no disclosure issues to worry about, since stock amounts are reported in the body of the balance sheet.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 113. Listed below are several inherent risks associated with stockholder’s equity.

REQUIRED: List the assertion associated with each of these.

Inherent Risk Related Assertion 1. Proceeds are not received.

2. All stock repurchased is not recorded as treasury stock.

3. The cost of treasury stock that is subsequently retired is not properly allocated among the appropriate accounts.

4. Dividends are recorded in the wrong period.

5. Stock options exercised or expired remain on the organization’s books.

6. Stock issued in exchange for goods/services is not properly valued.

7. Issuances/sales not authorized in accordance with organization’s bylaws.

8. Dividends may be recorded and paid before being declared.

ANSWER: Inherent Risk Related Assertion 1. Proceeds are not received.

Existence 2. All stock repurchased is not recorded as treasury Completeness stock.

3. The cost of treasury stock that is subsequently retired is not properly allocated among the Valuation appropriate accounts.

4. Dividends are recorded in the wrong period.

Existence 5. Stock options exercised or expired remain on the Rights/Obligations organization’s books.

6. Stock issued in exchange for goods/services is Valuation not properly valued.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 7. Issuances/sales not authorized in accordance with organization’s bylaws.

8. Dividends may be recorded and paid before being declared.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-02 - LO: 13-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Inherent Risks Associated with Debt and Equity

Existence Existence

114. Barley Company is a medium-sized industrial firm that has been audited by your firm for several years.

The only interest-bearing debt owed by Barley is a $300,000 long-term notes payable held by First National Bank. The notes were issued 4 years earlier and will mature in 8 more years. Barley is highly profitable, has no pressing needs for additional financing and has excellent internal controls of the recording of loan and related interest cost transactions.

REQUIRED: 1. Based on this scenario, describe the auditing procedures that you think will be necessary for notes payable and related interest accounts.

2. How will you answer differ if instead Barley Company was unprofitable, needed additional financing and had ineffective internal controls?

1. Auditing necessary for Barley’s notes payable and related interest accounts in this ANSWER: scenario would be minimal. Aside from checking interest calculations and postings to the proper accounts as a matter of audit routine, the only major audit procedure would be to confirm the amount and provisions of the note with First National Bank.

2. If Barley was unprofitable, needed additional financing, and had ineffective internal controls, the story would be much different. It would be necessary to search for unrecorded notes by obtaining standard bank confirmations with specific reference to the existence of notes payable, reviewing the bank statements and reconciliations for new notes credited directly to the bank account by the bank, and analyzing interest expense to uncover a payment to a creditor who is not included on the notes payable schedule.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-04 - LO: 13-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Control Risks Associated with Debt and Equity 115. A CPA firm is engaged in the examination of the financial statements of Garrison Corporation for the year ended December 31, 2014. Garrison Corporation’s financial statements and records have never been audited by a CPA. The stockholders’ equity section of Garrison Corporation’s balance sheet at December 31, 2014, follows: Stockholders’ Equity: Capital stock—20,000 shares of $10 par value authorized: Cengage Learning Testing, Powered by Cognero

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 5,500 shares issued and outstanding Capital contributed in excess of par value of capital stock Retained earnings Total stockholders’ equity

$ 55,000 63,800 110,000 $228,800

Founded in 2006, Garrison Corporation has ten stockholders and serves as its own registrar and transfer agent.

It has no capital stock subscription contracts in effect.

REQUIRED: Prepare the detailed audit program for the examination of the three accounts composing the stockholders’ equity section of Garrison Corporation’s balance sheet. (Do not include in the audit program the verification of the results of the current-year operations.)

Audit Program for Stockholders’ Equity ANSWER: 1. Examine articles of incorporation, the bylaws, and minutes of the board of directors from inception to determine the provisions or decisions relating to the capital accounts.

(Necessary only for the first year of the audit. Subsequent years will update the information.) Determine that the accounting records are in accordance with the provisions and that appropriate footnote disclosure is made. Extract pertinent date for the permanent file.

2. Examine stock certificate stub book and determine if it agrees with the capital stock account. Alternatively, if the stock is listed with an independent agent, confirm the stock transactions and current outstanding stock with the independent stock agent.

3. Schedule all entries to the accounts since inception. Vouch (examine documentation) supporting all entries into the accounts. Recompute major transactions to determine that the accounts have been properly classified and amounts credited to capital in excess are properly computed.

4. Examine retained earnings from inception: ∙ Schedule all entries into the account noting all that come from other than the annual closing of income and expense summaries. ∙ Examine support for all entries to retained earnings to determine if classification is correct. ∙ All stock dividends, or cash dividends, should be examined to determine appropriate valuation to retained earnings.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-06 - LO: 13-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responding to Material Misstatement Risks for Debt and Equity 116. James Carson and Martin Tighe, CPAs have audited all the figures on the balance sheet. James Carson argues with Martin Tighe that since the retained earnings figure is a balancing figure, it requires no further verification. Martin Tighe, however, disagrees and argues that they should still choose to verify retained earnings. Who do you agree with and why?

ANSWER: Martin Tighe is correct.

The retained earnings account should be audited because these audit procedures help to provide reasonable assurance that: ∙ no important items were overlooked in the examination of the account; ∙ the account is handled in accordance with GAAP, for example, only prior period correcting entries are taken to retained earnings directly; ∙ extraordinary items are recorded through the income statement; and ∙ stock dividends are recorded correctly.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 117. On your first audit for Stark Company, you learn that the company declared a 15% stock dividend during the last quarter of the year. Identify the evidence you would examine to determine whether the stock dividend was accounted for properly.

ANSWER: Stark Company’s 15% stock dividend should be accounted for as a debit to retained earnings for the fair market value of the dividend and credited to capital stock and capital in excess of par. The auditor should be sure the board of directors authorized the dividend through review of the board minutes and should examine The Wall Street Journal or another financial reporting service to determine the fair market value of the dividend at the time of declaration. The auditor could then trace the amounts to their recording in the general ledger to determine if they were properly accounted for.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 118. The following covenants are extracted from the indenture for McMorris Industries’ 20 year-bond. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance.

REQUIRED: Assume that each of these is an independent scenario and identify the audit steps that should be taken or reporting requirements necessary in connection with (a) through (d). a. The debtor company shall endeavor to maintain a working capital ratio of 2.5 to 1 at all times, and, in any fiscal year following a failure to maintain this ratio, the company shall restrict compensation of the CEO and executive officers to a total of no more than $1,000,000. Executive officers for this purpose shall include the chairman of the board of directors, the president, all vice presidents, the secretary, and the treasurer. b. The debtor company shall insure all property that is security for this debt against loss by hurricane to the extent of 90% of its actual value. Insurance policies securing this protection shall be filed with the trustee. c. The debtor company shall pay all taxes legally assessed against the property that serves as security for this debt within the time provided by law for payment without penalty and shall deposit receipted tax bills or equally acceptable evidence of payment of same with the trustee. d. A sinking fund shall be established and deposited with the trustee by semiannual payments of $450,000, from which the trustee shall, at his/her discretion, purchase bonds of this issue.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions ANSWER:

Any failure, or likely failure, of McMorris Industries to comply with the covenants should be reported in a note to the financial statements.

Audit steps for each independent scenario follow: a. The balance sheets should be reviewed for each applicable period to determine compliance with the covenant. If the company is below the stated ratio, the auditor should review officer compensation to determine if it is in compliance with the covenant. b. Examine client copies of insurance policies or certificates of insurance to determine compliance with the covenant. The auditor should prepare a summary of all the scheduled information contained in the policies. In addition, the auditor should confirm the existence of the policies with the trustee. c. Examine vouchers supporting tax payments on all property covered by the indenture. If vouchers are questionable, confirm tax payments with the trustee who holds the tax receipts. d. Vouch the payments to the sinking fund. Confirm bond purchases and the sinking fund balance with trustee. Confirm any cancellation of bonds with the trustee or observe the canceled bond.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 119. You are engaged in the audit of Bordon Corporation, whose records have not previously been audited by your firm. The company has an independent transfer agent, as well as a registrar for its capital stock. The transfer agent maintains the record of stockholders, while the registrar checks that there is no overissue of stock.

Both the transfer agent and registrar are required to validate stock certificates.

One of the seniors on the audit proposes that confirmations be obtained from both the transfer agent and registrar regarding the outstanding stock balance at the balance sheet date. If the confirmations agree with the books, then he proposes that no additional work is to be performed on the capital stock account.

REQUIRED: Do you agree or disagree that this will be sufficient? If yes, give the justification for your position. If no, state specifically all additional steps you would take and why you would take them.

The senior’s proposal of limiting work to the confirmations is not justified by the facts in the ANSWER: scenario. Although the transfer agent and the registrar know the number of shares issued, they do not necessarily know the number of shares outstanding. Furthermore, an audit of capital stock includes more than just determining the number of shares outstanding. For example, do authorizations exist for the issuance of shares? What assets were received in payment of shares? How were the transactions recorded? Are there any subscription contracts? Confirmation from the registrar could not help in determining these things.

Additional audit steps that need to be taken for the Bordon Corporation audit are: 1. Examine the corporation charter to determine the number of shares authorized and the special provisions for each class of stock if more than one class is authorized.

2. Examine minutes of stockholders' and directors' meetings to determine authorization for appointments of the registrar and the transfer agent; to determine authorization for the

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions issuance or reacquisition of shares.

3. Examine provisions regarding capital stock in the corporation law of the state of incorporation—to determine any special provisions, such as those for the issuance of no par stock.

4. Analyze the capital stock accounts to obtain an orderly picture of stock transactions for use as a guide to other auditing procedures and as a permanent record.

5. Trace the consideration received for capital stock into the records—to determine what consideration has been received and how it has been recorded.

6. Examine and schedule treasury stock and review entries for treasury stock—to determine the existence of treasury stock as authorized and to determine that a proper record has been made.

7. Review registrar's invoices and cash disbursements—to determine that original issue taxes have been paid.

8. Compare dividends with stock outstanding at dividend dates—to determine that dividends have been properly paid and also to substantiate the stock outstanding.

9. Review subscription and option contracts, etc.—to determine the facts in regard to subscriptions and options and to determine that these facts have been properly recorded and that they are adequately disclosed.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity 120. The Thomas Corporation took out a 20-year mortgage on a new headquarters building on June 30, 2014 for $3,000,000 and pledged its only manufacturing facility and the land on which it stands as collateral. The monthly payment to the mortgagor is $25,000 and was first paid on July 1, 2014. Your firm has audited this client before, but the client has never had a mortgage in previous years. You are in charge of the current year audit for Thomas, which has a balance sheet date of December 31, 2014.

REQUIRED: 1. Explain why it is desirable to prepare a schedule for the permanent file regarding the mortgage. What type of information should this include?

2. Explain why the audit of mortgage payable, interest expense, and interest payable should all be performed together.

3. List audit procedures that are typically performed to verify the issue of the mortgage, the mortgage and the interest payable account balances at December 31, 2014, and the balance in interest expense for 2014.

4. What type of information should be disclosed in the footnotes for this mortgage to help the auditor determine whether the completeness and presentation/disclosure assertions are satisfied?

1. It is a good idea to prepare an audit schedule for the permanent file for the mortgage ANSWER: information concerning the mortgage so it will be conveniently available for future years' audits. This information should include all the provisions of the mortgage as well as the purchase price, date of purchase, and a list of items pledged as collateral. It may also contain an amortization schedule of principal and interest.

2. The audit of mortgage payable, interest expense, and interest payable should all be performed together since these accounts are related and the results of testing each account affect the other accounts. The likelihood of misstatement in the client's records is determined more efficiently and effectively by performing these procedures together.

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Chapter 13 - Auditing Debt Obligations and Stockholders' Equity Transactions 3. The audit procedures that should ordinarily be performed to verify the issue of the mortgage, the balance in the mortgage and interest payable, and the balance in the interest expense accounts are: a. Determine if the mortgage was properly authorized. b. Obtain the mortgage agreement and schedule the pertinent provisions in the permanent file, including the face amount, payments, interest rate, restrictions, and collateral. c. Confirm the mortgage amount, terms, and collateral with the lending institution. d. Recompute interest payable at the balance sheet date and reconcile interest expense to the decrease in principal and the payments made. e. Test interest expense for reasonableness.

4. Generally accepted accounting principles require disclosures related to long-term debt.

The terms of the mortgage are to be disclosed, including interest rates, maturity dates, five-year payment information, assets pledged as collateral, among other items. Significant restrictions on the activities of the company, such as maintaining cash or other compensating balances or restricting the amount of dividends that can be paid, should be disclosed. Thus, auditors should obtain copies of the mortgage agreement to determine that the client’s disclosures are complete and accurate.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.13-08 - LO: 13-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Substantive Audit Procedures for Debt and Equity

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Chapter 14 - Activities Required in Completing a Quality Audit 1. Review activities that are completed towards the end of the audit are quite varied. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 2. Misstatements that are detected, but individually are not material, should be ignored when determining the appropriate audit report. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 3. Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 4. At the end of an audit, adjustments that are “waived” will remain uncorrected. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 5. The auditor compares the total likely misstatements to each significant segment of the financial statements, such as total current assets, total noncurrent assets, total current liabilities, total noncurrent liabilities, owners’ equity, and pretax income, to determine if they are, in aggregate, material to the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 6. The total likely misstatements found during the audit are equal to the sum of known and projected misstatements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 7. The materiality of a misstatement is based on only the quantitative amount of the misstatement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 8. An audit firm culture that emphasizes “doing the right thing,” encourages auditors to deal with difficult issues in a short period of time. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit TOPICS:

Reviewing, Summarizing and Resolving Detected Misstatements

9. A culture that encourages auditors to seek consultation with other members of the audit firm will be more likely to result in auditors who will acquiesce to inappropriate or aggressive client preferences. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 10. PCAOB AS 14 provides important insight that auditors must consider as they decide whether management’s refusal to correct a detected misstatement is indicative of intentional bias. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 11. In an integrated audit, if one or more material weaknesses exist, the auditor will need to issue a qualified opinion on internal control over financial reporting. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 12. Multiple internal control deficiencies in the same cycle may actually decrease the likelihood of misstatement in that cycle. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 13. FASB has set forth four categories of potential losses that can be reasonably estimated. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 14. Auditors are responsible for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 15. The primary source of evidence concerning contingencies is the client’s external attorney. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 16. Regarding loss contingencies, legal counsel should be instructed by the client to respond directly to the auditors. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 17. If a lawyer refuses to furnish the requested information about the client’s contingencies to the auditor, the auditor should issue an unqualified audit opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 18. Property and casualty insurance premiums are examples of estimates found on financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 19. Auditors should have heightened skepticism regarding period-end adjusting journal entries that relate to accounts with significant estimates. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 20. Estimates are based on both subjective and objective factors. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 21. Events or transactions occurring after the balance sheet date and before the audit report date, can be useful in identifying and evaluating the reasonableness of estimates. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 22. A deviation from historical patterns is one of the factors that an auditor focuses on when evaluating the reasonableness of an estimate. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 23. The auditor should consider the historical experience of the client in making past estimates. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 24. A policy providing a reserve for returned products at the original sales price rather than at replacement cost violates GAAP. a. True b. False ANSWER: True POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 25. If the auditor determines that informative disclosures are not reasonably adequate, the auditor must identify that fact in the auditor’s report. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 26. Disclosures can be made either on the face of the financial statements in the form of classifications or in parenthetical notations and/or in the notes to the statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 27. A disclosure checklist is a convenient documentation format for evidence that the auditor adequately evaluated the client’s disclosures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 28. The auditor should consider matters for disclosure only while gathering evidence during the course of the audit. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 29. The auditor’s report specifically covers the statements and disclosures made by management in the “Management Discussion and Analysis” (MD&A) section of the annual report. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 30. Auditors routinely review the MD&A to provide reasonable assurance that it does not contain information that is factually inaccurate or inconsistent with the audited portion of the financial statements and accompanying footnotes. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 31. Noncompliance with laws and regulations includes only acts of omission by the entity that are considered to be unintentional and contrary to the prevailing laws or regulations. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 32. Auditing standards recognize that there are inherent limitations in an auditor’s ability to detect material Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit misstatements relating to the entity’s compliance with laws and regulations. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 33. Auditors are responsible for obtaining reasonable assurance that the financial statements are free from material misstatements, including material misstatements related to noncompliance with laws and regulations. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 34. When obtaining reasonable assurance that the financial statements are free from material misstatements, auditors should consider the applicable legal and regulatory frameworks that apply to the entity. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 35. If management or those charged with governance do not demonstrate a commitment to internal control over noncompliance with laws and regulations, then the auditor should withdraw from the engagement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 36. According to the Foreign Corrupt Practices Act of 1977 (FCPA), companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and design and maintain an adequate system of internal accounting controls. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 37. If an auditor becomes aware of violations of the Foreign Corrupt Practices Act of 1977 (FCPA), the auditor should notify the CFO about the violations, their circumstance, and the effect on the financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 38. If a client makes payments to a middle-man who uses the funds to obtain corporate tax refunds for the client from government officials, this is not considered a violation of the Foreign Corrupt Practices Act of 1977 (FCPA). a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 39. Auditors are required to evaluate the likelihood of each client continuing as a going concern for a reasonable period into the foreseeable future. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 40. If the auditor continues to have substantial doubt about the client continuing as a going concern, the auditor should evaluate the adequacy of the client’s related disclosures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 41. An audit opinion is a guarantee that the business is a going concern. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 42. The going-concern evaluation must be based on separate procedures that test the client’s ability to continue as a going concern. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 43. Two paragraphs should be added to the auditor’s report when the auditor concludes that substantial doubt remains about the client’s ability to continue as a going concern for a reasonable period of time. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 44. Management will often resist a going-concern modification because investors, lenders, and customers may lose faith in the business. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 45. Some auditors may be reluctant to issue a going-concern audit opinion because it may hasten the failure of the client company. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 46. Significant changes in the competitive market and a decrease in the competitiveness of the client’s products are potential indicators of going-concern problems. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 47. A number of studies of bankruptcies have shown that certain combinations of ratios, like the Altman Zscore, have good predictive power in indicating the likelihood of bankruptcy. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 48. Research has shown that auditors’ qualifications of audit reports are better predictors of going-concern problems than are Z-score models. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 49. Analytical procedures help auditors assess the overall presentation of the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 50. By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 51. Analytical procedures may indicate that new controls need to be designed before completing the audit. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 52. Ratio analysis, common-size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for this purpose. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 53. Analytical procedures conducted during the final review phase of the audit should corroborate conclusions formed during the audit, which enables the auditor to draw conclusions upon which to base the audit opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 54. When management is unable to provide an explanation for a previously unrecognized risk identified through the analytical procedures, the auditor must issue an adverse opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 55. The auditor should apply a basic three-step process for using analytical procedures during the final review. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 56. The auditor’s expectations in final analytical procedures must be more precise than those for substantive analytics. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 57. The signing officers for the certifications under the Sarbanes-Oxley Act are typically the controller and the treasurer of the company. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 58. In a quality audit, the auditor will review management’s processes for certification to provide reasonable assurance that those processes are adequate and that they can be relied upon. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 59. Auditors should obtain a management representation letter at the end of each audit.

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Chapter 14 - Activities Required in Completing a Quality Audit a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 60. Management’s refusal to sign the management representation letter is considered a scope limitation sufficient to preclude the issuance of an unqualified opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 61. Type I subsequent events indicate conditions that did not exist at the balance sheet date, but that may require disclosure. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 62. An example of a Type I subsequent event would be a significant lawsuit that is initiated relating to an incident that occurred after the balance sheet date. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 63. Procedures such as a cutoff test and a search for unrecorded liabilities are related to subsequent events. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 64. When the auditor becomes aware of an event that occurs after the audit report date, but before the issuance of the audit report to the client and the event is disclosed in the footnotes, the auditor would date the report as if this fact had been known at year-end. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 65. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report due to subsequent events after issuance of the audit report, the auditor should not try to obtain client cooperation, but should immediately notify any regulatory agency having jurisdiction over the client, such as the SEC, that the audit report should no longer be associated with the client’s financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 66. An additional procedure related to subsequent events is the reading of the meeting minutes for the board of directors meeting. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 67. If an omission of an important audit procedure is discovered, the auditor should immediately issue a disclaimer of opinion for the audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-10 - LO: 14-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date 68. If omitted audit procedures cannot be performed, the auditor should extend previous work done and modify the report, if necessary. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-10 - LO: 14-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date 69. Typically, omissions may be discovered when audit documentation is reviewed as part of an external or internal review program. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-10 - LO: 14-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date 70. When it is discovered that an important audit procedure was not performed, the SEC imposes sanctions against the audit firm responsible. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-10 - LO: 14-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date 71. As part of a quality audit, the audit firm must have policies and procedures in place for conducting an engagement quality review of each audit before issuing the audit opinion for public companies. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 72. If an experienced reviewer who was not a part of the audit team, but who has appropriate competence, independence, integrity, and objectivity, performs an independent quality review, this is referred to as a reoccurring partner review. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 73. The engagement quality review is a risk-based review. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 74. The audit documentation when performing an engagement quality review should include such information such as how much the firm paid for the review. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 75. It is important that the external auditor have a constructive and detailed dialogue with the audit committee on important aspects of the audit. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 76. The audit committee is typically independent of the board of directors. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 77. All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 78. The auditor generally reports things that management could do better in a management letter as a constructive part of the audit.

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Chapter 14 - Activities Required in Completing a Quality Audit a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 79. A management letter is the same as a management representation letter. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 80. A management letter is not required. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 81. After the auditor completes the current audit, an issue of importance for subsequent year audits is mandatory partner rotation. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 82. Audit firm culture plays a role in audit firm portfolio management in that some audit firms are willing to provide audits to riskier clients, while other audit firms are not willing to do so.

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Chapter 14 - Activities Required in Completing a Quality Audit a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-14 - LO: 14-14 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Client Continuance Decisions 83. In addition to risk factors, an important consideration in client continuance decisions involves the audit firm’s growth strategy. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-14 - LO: 14-14 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Client Continuance Decisions 84. Audit firm portfolio management decisions are not important in achieving audit quality. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-14 - LO: 14-14 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Client Continuance Decisions 85. If an audit firm accepts or continues to provide audits to a client firm with ineffective internal controls over financial reporting, the management representation letter will note that an adverse opinion will likely be issued. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-14 - LO: 14-14 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Client Continuance Decisions 86. The familiarity threat is the most relevant issue for mandatory partner or audit firm rotation.

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Chapter 14 - Activities Required in Completing a Quality Audit a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-15 - LO: 14-15 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Partner Rotation and Audit Firm Rotation 87. Rules are standardized internationally in terms of mandatory partner rotation and mandatory audit firm rotation. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-15 - LO: 14-15 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Partner Rotation and Audit Firm Rotation 88. A cooling off period is the number of years after which the individual auditor or audit firm may resume its prior role with the audit client. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-15 - LO: 14-15 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Partner Rotation and Audit Firm Rotation 89. The AICPA Auditing Standards Board (ASB) requires a 5-year mandatory cooling off period for partner rotation. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-15 - LO: 14-15 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Partner Rotation and Audit Firm Rotation Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 90. The Public Company Accounting Oversight Board (PCAOB) requires mandatory audit firm rotation after six years, with a cooling off period of four years. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-15 - LO: 14-15 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Partner Rotation and Audit Firm Rotation 91. Most audit firms use a schedule to accumulate the known and projected misstatements and the carryover effects of prior-year uncorrected misstatements. Which of the following statements regarding this process is false? a. Adjustments made to correct the financial statements are referred to as booked. b. Possible adjustments to the financial statements that are left uncorrected are referred to as waived. c. Tax effects are not shown on schedules of correcting errors. d. The nature of the misstatement, as well as the quantitative amount, is considered in the judgment of materiality.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 92. During the course of an audit, misstatements that are individually immaterial may be detected. What should the auditor do with these? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 93. Which of the following is one of the most important drivers of audit quality in cases where an auditor may Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit feel some pressure to acquiesce to management’s demands to not require that misstatements be corrected in order to preserve a harmonious working relationship? a. Firm culture. b. Ethics training. c. Annual income of the CPA firm. d. PCAOB guidance.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 94. Which of the following would be considered “the nature of a misstatement” that might make it material? a. Comparing the sum of known and projected misstatements to total current assets. b. Comparing the sum of known and projected misstatements to total current liabilities. c. Comparing the sum of known and projected misstatements to pretax income. d. Having the effect of changing a positive earnings trend to a negative earnings trend.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 95. An audit firm culture that emphasizes “doing the right thing” does not incorporate which of the following to enhance audit quality? a. Encouraging auditors to seek consultation with other members of the audit firm. b. Yielding to management’s demands in order to promote additional service engagements. c. Taking sufficient time to deal with difficult client issues. d. Emphasizing long-term reputation over the immediate satisfaction of client preferences.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 96. Which of the following are categories that do not reflect the contingent nature of losses and the guiding criteria organized around probability of outcomes as provided by the FASB? a. Guaranteed. b. Reasonably possible.

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Chapter 14 - Activities Required in Completing a Quality Audit c. Remote. d. Probable.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 97. Which of the following types of information is not a type of evidence that the auditor should obtain concerning contingencies? a. Information about major contracts in which contingencies may be present. b. Documentation of communication with internal and external legal counsel of the client. c. Accounts receivable confirmations. d. Documentation of contingent liabilities contained in corporate minutes, correspondence from governmental agencies, and bank confirmations.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 98. Which of the following items does the auditor ask the client to send to its legal counsel requesting information about asserted claims? a. A letter of audit inquiry. b. A management representation letter. c. A management letter. d. A loss reserve confirmation.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 99. Which of the following items is not typically requested from the lawyer of a company regarding contingencies? a. Any limitations on the lawyer’s response such as not devoting substantial attention to the item or that the amounts are not material. b. Information about the attorney’s other clients with similar contingencies. c. A description of each contingency, as well as progress and action that the company plans to take.

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Chapter 14 - Activities Required in Completing a Quality Audit d. A comment on the completeness of management’s list of contingencies and an evaluation.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 100. When responding to the auditor as a result of the audit client's letter of inquiry, how might the attorney limit the response? a. Limit the response to litigations in process. b. Limit the response to asserted claims. c. Limit the response to matters to which the attorney has given substantive attention in the form of legal consultation or representation. d. Limit the response to items which the attorney believes will result in loss to the client.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 101. Which of the following parties has the responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies? a. Management. b. The auditor. c. The audit committee. d. The client's attorney.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 102. 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 GAAP 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.

ANSWER: c Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 103. Assume a situation in which an attorney who provided significant litigation counsel to a client to refuses to furnish information requested in an audit. Which of the following descriptions best describes this situation from the auditor’s perspective? a. A departure from GAAP. b. A scope limitation. c. A violation of the attorney-client privilege. d. A contingent liability.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 104. Fulton Educational Company, 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 not include which of the following? a. Sending a letter to the client's attorneys for more information. b. Discussing the matter with the client and their insurance adjuster. c. Confirming with the harmed party regarding the amount that will be claimed. d. Assessing whether accrual or disclosure by the client was reported in accordance with GAAP. ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 105. In the letter of audit inquiry concerning a description and evaluation of litigation, claims and assessment provided by management to the auditor, which of the following is the client’s lawyer not requested to provide? a. Information on the completeness of management’s list. b. Information on the compliance of the disclosures with GAAP. c. Information on the likelihood and range of possible losses. d. Information on any limitations on the lawyer’s response.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 106. When evaluating accounting estimates, the auditor would not concentrate on which of the following key factors and assumptions? a. Those that are within budgetary expectations. b. Those that are subjective and susceptible to misstatement and bias. c. Those that are inconsistent with current economic trends. d. Those that are sensitive to variations.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 107. In evaluating the reasonableness of an estimate, the auditor would not normally concentrate on which of the following factors and assumptions? a. Subjective judgments that introduce bias. b. Deviations from historical patterns. c. Amounts that are inconsistent with current economic trends. d. All of these are a focus of the auditor regarding reasonable estimates.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 108. Which of the following is not a reason why the auditor needs to take special care to review significant estimates in the financial statements? a. Organizations may try to use the estimates to “smooth” earnings. b. Organizations may create hidden reserves in unusually good years that can be used in years when real profits do not meet expectations. c. Companies may underestimate liabilities or impairment of asset values to achieve reported earning goals in years when real profits to not meet expectations. d. Companies may try to overestimate liabilities in computing leverage ratios.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Reviewing Significant Estimates

109. Which of the following is not true regarding accounting estimates? a. Accounting estimates are based on management’s knowledge and experience of past and current events. b. Accounting estimates are based on management’s assumptions about conditions that are expected to exist and courses of action the company expects to take. c. Accounting estimates are based on both subjective and objective factors d. Because accounting estimates are based, in part, on management’s knowledge and experience, they are not biased.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 110. 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-03 - LO: 14-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Significant Estimates 111. Which of the following is false regarding the use of an audit checklist for disclosures? a. It is a convenient documentation format. b. It reminds the auditor of matters that should be considered for disclosure. c. It can be organized to include relevant professional guidance. d. It covers all potential unusual circumstances.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit TOPICS:

Reviewing the Adequacy of Disclosures

112. Which one of the following is false regarding the adequacy of disclosures in a financial statement audit? a. The auditor should consider matters for disclosure while gathering evidence during the course of the audit, not just at the end of the audit. b. One of the key disclosures is a summary of significant accounting policies used by the company. c. Disclosures should be limited to only checklist items. d. The auditor’s report does not specifically cover the statements made by management in the “Management Discussion and Analysis” (MD&A) section of the annual report.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 113. Assessing disclosures does not require reasonable assurance of which of the following? a. The disclosures are understandable to users. b. Disclosed events and transactions have occurred and pertain to the entity. c. All material and immaterial disclosures have been reported. d. The information is disclosed accurately and at appropriate amounts.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 114. 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. GAAS. c. Inquiry of the CFO. d. Checklists.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 115. Which of the following is not an inherent limitation in an auditor’s ability to detect material misstatements Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit relating to a client’s compliance with laws and regulations? a. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements, so the information systems relating to financial reporting may not capture noncompliance. b. The legal implications of noncompliance are ultimately a matter for legal authorities to resolve, and are not a matter about which the auditor can resolve. c. Management may act to conceal noncompliance, or may override controls, or may intentionally misrepresent facts to the auditor. d. Auditors are not required to consider the applicable legal and regulatory frameworks that apply to the entity.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 116. What should an auditor do when becoming aware of violations of the FCPA? a. Contact foreign officials in the country where the client has business operations. b. Notify the audit committee about the violations, their circumstance, and the effect on the financial statements. c. Contact the U.S. marshals. d. Design internal controls to deter improper payments.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Assess Noncompliance with Laws and Regulations 117. Which of the following is not a main provision of the Foreign Corrupt Practices Act of 1977 (FCPA)? a. No U.S. person or companies that have securities listed on U.S. markets may make a payment to a foreign official for the purpose of obtaining or retaining business. b. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company. c. Designing and maintaining internal accounting controls is the role of internal auditors when management conducts business in a foreign country. d. Certain payments made to an official to expedite the performance of the duties that the official would already be bound to perform are acceptable.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-05 - LO: 14-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Review and Assess Noncompliance with Laws and Regulations

118. On what information does the auditor base a going concern evaluation? a. On separate procedures. b. On the management discussion and analysis (MD&A). c. On information obtained from normal audit procedures performed to test management’s assertions. d. On the statement of cash flows for the current period.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 119. Which of the following is not an indicator of a potential going-concern problem? a. Negative trends in profitability. b. External matters increasing regulatory requirements. c. Significant changes in competition. d. An Altman Z-score above 3.0.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 120. If the auditor concludes that there may be a going-concern problem, which of the following is not typically evaluated to determine the reasonableness of management’s plans to overcome this problem? a. Management’s assumption about increasing prices or market share in relationship to current industry developments. b. Management’s assumptions about cost savings related to a reduction in the work force should be recomputed and evaluated to determine any hidden costs. c. Management’s past track record related to delaying unnecessary expenditures. d. Management’s assumptions about selling off assets and their relationship to current market prices.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 121. If conclusion is drawn that there may be a going concern problem, which of the following should the auditor do? 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 that is one level above the controller.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 122. If the auditor concludes that there may be a going-concern problem with the client, which of the following is the best course of action for the auditor to follow? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 123. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 124. Which one of the following is not a key condition indicating doubt about a client’s ability to continue as a going-concern? a. Adverse key financial ratios.

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Chapter 14 - Activities Required in Completing a Quality Audit b. Employee strike that halts operations for several months. c. Company has not paid dividends to date. d. Default on bank debt.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 125. The auditor is responsible for evaluating the likelihood of a client continuing as a going concern for a reasonable period of time. What is considered to be a reasonable time period? 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 126. The auditor is responsible for evaluating the likelihood of a client not being a going concern 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 127. Which of the following is not a potential indicator of going concern problems for a client? a. Negative trends in key financial ratios. b. Loss of key personnel. c. Plan to sell nonessential assets. d. Default on a loan.

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Chapter 14 - Activities Required in Completing a Quality Audit ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 128. If substantial doubt remains about going concern for a client at the end of the audit, then which of the following reports should the auditor typically issue? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-06 - LO: 14-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating the Going-Concern Assumption 129. 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. All of the above would typically be used.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 130. Before releasing the audit report, which of the following would the auditor most likely do? a. Issue a management letter. b. Perform an analytical review. c. Check on a schedule of partner rotation. d. Estimate client fee for subsequent services to be performed.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Performing Analytical Review of the Financial Statements

131. During which of the following phases of the audit are analytical review procedures required by the auditing standards? a. The planning phase of the audit. b. The final review phase of the audit. c. Both the planning and final review phases of the audit. d. Performance of tests of controls.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 132. Which of the following statement is false regarding analytical procedures that help auditors assess the overall final presentation of the financial statements? a. By performing a final analytical review, the audit firm will identify any unusual, unexpected, or unexplained relationships that should be resolved before the issuance of the audit report. b. A basic five step process for using analytical procedures applies. c. Analytical procedures provide evidence on whether certain relationships make sense in light of the knowledge obtained during the audit. d. Auditing standards require the use of analytical procedures in the final review phase of the audit to assist in identifying ending account relationships that are unusual.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 133. Which of the following activities is not a step in the process for using analytical procedures? a. Define when the difference between the auditor’s expectation and the client’s balance would be considered significant. b. Compute the difference between the auditor’s expectation and the client’s balance. c. Perform appropriate followup on all material and immaterial differences. d. Develop an expectation.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Performing Analytical Review of the Financial Statements

134. Analytical procedures conducted at the end of an audit are performed to examine trends and changes. What is typically another purpose of analytical procedures at the end of the audit? a. To document planning in accordance with GAAS. b. To provide the client with a value added service in conjunction with audit activities. c. To ask "hard questions" about the company's results and its relationship to external factors. d. To increase the amount of items reported in the management letter.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 135. Which of the following procedures is the least useful analytical procedure to indicate that further audit work needs to be performed before rendering the audit opinion? a. Developing a common-size analysis. b. Analyzing the dollar and percentage changes in each income statement item over the previous year. c. Comparing current earnings per share with earnings per share of the client’s primary competitor. d. Developing a ratio analysis.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 136. Which of the following is not a purpose of the management representation letter? a. It reminds management of its responsibility for the financial statements. b. It confirms oral responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses. c. It decreases the possibility of misunderstanding concerning the matters that are the subject of the representations. d. It implies that the auditor is responsible for the design of the internal controls.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 137. Management of AllTech, Inc. 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. What does this refusal constitute? a. A violation of full and fair disclosure. b. A securities law violation. c. A scope limitation. d. A breakdown in internal controls.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 138. 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 139. Which of the following individuals should sign the management representation letter? a. The members of the audit committee and board of directors. b. The chief executive officer and the chief financial officer. c. The chief financial officer and the treasurer. d. The controller and the auditor.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 140. The date of the audit opinion of Upton Industries, Inc. reads: March 7, 2014 except for Note D, as to which the date is March 12, 2014. What is this an example of?

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Chapter 14 - Activities Required in Completing a Quality Audit a. Improper reporting. b. A GAAP violation. c. Dual dating. d. A contingent event.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 141. Assume that a major customer of the company that you are auditing files for bankruptcy during the subsequent period because of a deteriorating financial condition. Neither you nor the client becomes aware of the event until the bankruptcy filing is reported. What type of subsequent event would this be? a. Type I subsequent event b. Type II subsequent event c. Neither Type I or Type II d. Both Type I and Type II ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 142. Which of the following would be a Type II subsequent event? a. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year end. b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year end. c. A stock dividend or split that takes place during the subsequent period should be disclosed. In addition, earnings-per-share figures should be adjusted to show the retroactive effect of the stock dividend or split. d. A material change occurs in the value of investment securities after the balance sheet date.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 143. Which one of the following subsequent events will least likely result in an adjustment to the financial Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 144. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 145. After completing the audit report of Blair Corporation, but before delivering the audit report to the client, a tornado demolished the main production facility. In this case, what option is available to the auditor other than dual dating the report? a. Use the original audit report date. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 146. When a subsequent event provides evidence about conditions that existed at the balance sheet date, what is Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit the best course of action for the auditor to follow? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 147. When a subsequent event provides evidence about conditions that did not exist at the balance sheet date, what is the best course of action for the auditor to follow? 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 148. Which of the following is the best example of a Type I subsequent event? a. A related-party transaction occurs during the course of the audit. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 149. Which one of the following is not an example of an additional procedure that typically relates 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 150. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 151. Which of the following correctly states the period for which the auditor is responsible for subsequent events? 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 152. After an audit report is issued, the auditor discovers through a peer review that an important audit procedure has been omitted. In this case, what should the auditor do?

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Chapter 14 - Activities Required in Completing a Quality Audit 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-10 - LO: 14-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date 153. If the auditor failed to confirm receivables when that should have been done and it may be too late to confirm now, what should the auditor do? a. Issue an adverse opinion. b. Extend the previous work done on subsequent collections to help determine that the receivables existed and were properly valued at the balance sheet date c. Automatically decide that the previously issued audit report cannot be supported in light of the omitted procedures. d. Issue a disclaimer of opinion.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-10 - LO: 14-10 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Consideration of Omitted Procedures Discovered after the Report Date 154. Which of the following procedurea is not performed as part of an engagement quality review? a. Evaluate judgments about materiality and the disposition of corrected and uncorrected identified misstatements. b. Call each board member to discuss the potential for fraud. c. Confirm with the lead audit partner that there are no significant unresolved matters. d. Evaluate whether appropriate levels of supervision and reviews of individual audit tasks were completed adequately during the audit.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 155. Which of the following is explicitly required by the Sarbanes-Oxley Act of 2002 for audits of public companies?

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Chapter 14 - Activities Required in Completing a Quality Audit a. Subsequent event review. b. Engagement quality review. c. Disclosure of all contingent liabilities. d. Seven year client rotation.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 156. The partner performing an engagement quality review will review the working papers and financial statements but will not perform which of the following? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 157. 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 most qualified to perform this concurring partner review? a. The engagement partner who has worked on the client for three years. b. An employee of the enforcement division of the SEC. 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing an Engagement Quality Review 158. Which of the following is not a typical communication between the auditor and the audit committee? a. The auditor should clearly communicate the auditor’s responsibility under Generally Accepted Auditing Standards (GAAS). b. The auditor should clearly communicate the planned scope of the audit engagement with the audit Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit committee and discuss its adequacy. c. The auditor and management should discuss issues related to the retention of both client staff and audit firm staff during the period of audit. d. All major accounting disagreements with management, even if eventually resolved, should be discussed with the audit committee.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 159. If the audit team encounters difficulties in performing an audit, who should the audit team communicate these matters to? a. The SEC. b. The audit committee. c. Management. d. The PCAOB. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 160. Which of the following is not a required communication with the audit committee? a. Auditor’s responsibility under GAAS. b. Analytical review. c. Audit adjustments. d. Uncorrected misstatements.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 161. 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.

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Chapter 14 - Activities Required in Completing a Quality Audit ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-12 - LO: 14-12 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Responsibilities of External Auditors to Communicate with the Audit Committee 162. What is the letter called that is drafted by the auditor and reports observations to management which may help management perform more effectively? a. The letter of reportable conditions. b. The management representation letter. c. The management letter. d. The contingent events document.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 163. Which of the following is false regarding the management letter? a. The management letter is not required b. The management letter is the same as the management representation letter. c. The management letter helps to provide management comfort that the auditor has done a quality job. d. The management letter helps provide management with information that the auditor knows and understands the client’s business.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 164. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 165. Client continuance-related risks do not include which of the following key type of risk? a. Client entity characteristics. b. Quantitative risk factors. c. Entity organizational or governance risks. d. All of these are key types of client continuance-related risks.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-14 - LO: 14-14 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Client Continuance Decisions 166. Which of the following statements is false regarding partner rotation and audit firm rotation? a. During a cooling off period, the individual or audit firm may not engage in any meaningful auditrelated interactions with the client. b. Rules are the same internationally regarding the terms of mandatory partner rotation and mandatory audit firm rotation. c. The issue associated with mandatory partner or audit firm rotation is the familiarity threat. d. Having a longstanding relationship with the client could aid audit quality because of the knowledge that the partner and members of the engagement team gain through time.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-15 - LO: 14-15 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Partner Rotation and Audit Firm Rotation 167. Adjustments In your audit of Lomar Company for the calendar year 2014, you find a number of items that you believe represent possible adjustments to the company’s books. Management does not want to make any adjustments.

REQUIRED: Assuming that Lomar is a public company describe how the adjustments might impact your audit report on internal control over financial reporting.

Auditors of public companies must evaluate the noted adjustments to determine their ANSWER:

impact on the auditor’s report on internal control over financial reporting. The audit of the financial statements and the audit of internal control over financial reporting for a public company are to be integrated. Public company auditors must consider the results of audit procedures performed to issue the audit report on the financial statements when issuing the audit report on internal control. For example, if the possible adjustments identified for

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Chapter 14 - Activities Required in Completing a Quality Audit Lomar Company are deemed to be material misstatements that were not initially identified by the company’s internal controls, the auditor should consider this as at least a significant deficiency, if not a material weakness for purposes of reporting on internal control. In this case, the auditor’s report on Lomar’s financial statements would be unqualified as long as management corrected the misstatement before issuing the financial statements.

However, the auditor’s report on internal control over financial reporting would include an adverse opinion if the auditor concludes that the company has one or more material weaknesses.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-01 - LO: 14-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Reviewing, Summarizing and Resolving Detected Misstatements 168. 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.

ANSWER: Corroborating evidence of contingent liabilities includes: ∙ letter of audit inquiry ∙ correspondence and invoices from lawyers ∙ corporate minutes ∙ contracts ∙ correspondence with governmental agencies ∙ bank confirmations POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 169. Contingencies Define what a contingency is, describe the auditor’s main concerns about them, and indicate how contingencies should be dealt with by management and the auditor. Besides litigation, claims and assessments, what are some other types of contingencies?

ANSWER: Contingencies are potential gain or losses that management may incur because of what may or may not occur in the future, e.g., a lawsuit against the client. In ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies”), the FASB provides the standard by which they 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, for example, the guarantee of another company’s debt.

Besides litigation, claims and assessments, other types of contingencies include purchase and sales commitments, agreements to repurchase receivables that have Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit been sold, and guarantees of the debts of others.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 170. Litigation, claims, and assessments Discuss the information management should provide related to litigation, claims and assessments. Also describe 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 the letter of audit inquiry.

ANSWER: Management is the primary source of information concerning litigation, claims and assessments and should provide the auditor with a description and evaluation of litigation, claims and assessments against them and assurance that the accounting and disclosure requirements under SFAS No. 5 have been met. 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 should also indicate any limitations in the response. A lawyer’s 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-02 - LO: 14-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Appropriate Accounting for Loss Contingencies 171. Management responsibilities Explain how management explicitly asserts their confidence and responsibility over the financial statements of the company.

ANSWER: The Sarbanes-Oxley Act requires certain members of management to certify that the financial statements are presented in accordance with GAAP and certain securities acts. The CEO and CFO must sign a statement to this effect. Some companies have extended this certification to divisional and subsidiary levels.

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Chapter 14 - Activities Required in Completing a Quality Audit Similar regulation exists for management's responsibility over internal control.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing the Adequacy of Disclosures 172. Disclosures You are a staff auditor on the audit of Cosmo Technologies, Inc. The audit partner asks you to carefully read the new mortgage contract with the Hometown Bank and abstract all pertinent information that might be needed for a financial disclosure.

Required: (1) List the information in a mortgage that is likely to be relevant to the auditor.

(2) What are the pros and cons of using a disclosure checklist for this task?

(1) The information in a mortgage that is likely to be relevant to the auditor includes the ANSWER: following: 1. The parties to the agreement 2. The effective date of the agreement 3. The amounts included in the agreement 4. The repayment schedule required by the agreement 5. The definition and terms of default 6. Prepayment options and penalties specified in the agreement 7. Assets pledged or encumbered by the agreement 8. Liquidity restrictions imposed by the agreement 9. Purchase restrictions imposed by the agreement 10. Operating restrictions imposed by the agreement 11. Requirements for audit reports or other types of reports on compliance with the agreement 12. The interest rate specified in the agreement 13. Any other requirements, limitations, or agreements specified in the document

(2) While a checklist helps remind the auditor of matters that should be considered for disclosure and provides a convenient format for the documentation of evidence, there may be items that should be disclosed but that are not covered by the audit firm’s checklist. The auditor, therefore, cannot blindly follow a checklist, but should also use good audit judgment especially when there are unusual circumstances of which the users should be aware. For example, what if Cosmo Technologies has a controlling interest in Hometown Bank? This would be a related-party issue.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Reviewing the Adequacy of Disclosures 173. Final Analytical Procedures and Disclosures When auditing Global Alliance Industries, Inc., the auditor performed extensive analytical procedures and Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit found the following: (a) The commission expenses as a percentage of sales has stayed constant for several years, but has increased significantly in the current year. However, commission rates have not changed. (b) The rate of inventory turnover has steadily decreased for the past four years. (c) The inventory as a percentage of current assets has steadily increased for the past four years. (d) The number of days’ sales in accounts receivable has steadily increased for three years. (e) The allowance for uncollectible accounts as a percentage of accounts receivable has steadily decreased for three years. (f) The absolute amounts of depreciation expense and depreciation expense as a percentage of gross fixed assets are significantly smaller than in the preceding year.

REQUIRED: (1) Evaluate the significance of not disclosing or adjusting these items, if material, in the fair presentation of financial statements.

(2) When assessing disclosures, what criteria do auditors use?

(1) ANSWER:

a. The commission expense could be overstated during the current year or could have been understated during each of the past several years. It is also possible that sales may have been understated during the current year or could have been overstated in each of the past several years. b. It is very possible that obsolete or unsalable inventory may be present and may require markdown to the lower of cost or market. c. When this item is combined with the potential high likelihood that obsolete or unsalable inventory may be present, as mentioned previously, it make sense that inventory may have been maintained at a higher level than is necessary for the company. d. The collection of accounts receivable appears to be a problem. It is very possible that an adjustment provision for uncollectible accounts may be necessary. e. When combined with (d) above, the allowance for uncollectible accounts may be understated. f. It is very likely that depreciation expenses may be understated for the year.

(2) When assessing disclosures, the auditor should have reasonable assurance that: • Disclosed events and transactions have occurred and pertain to the entity • All disclosures that should have been included are included • The disclosures are understandable to users • The information is disclosed accurately and at appropriate amounts

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-04 - LO: 14-04 AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Reviewing the Adequacy of Disclosures Performing Analytical Review of the Financial Statements 174. Analytical procedures What is the purpose of using analytical review procedures in the final review stages of the audit?

ANSWER: 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 Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-07 - LO: 14-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Performing Analytical Review of the Financial Statements 175. Management representation letters Describe the purpose of the management representation letter.

ANSWER: 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. POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations 176. Management representation letters Barrett Jennings, CPA, has prepared a letter of representation for the president and controller to sign. The following items are contained in it: (a) Inventory is fairly stated at the lower of cost or market and includes no obsolete items. (b) All actual and contingent liabilities are properly included in the financial statements. (c) All subsequent events, relevant to the financial statements, have been disclosed.

Required: (1) Why is it desirable to have a letter of management representation letter from the client concerning these matters when the evidence accumulated during the course of the audit is meant to verify the same information?

(2) How is the letter of management representation useful as audit evidence?

(3) What are several other types of information commonly included in the management representation letter?

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Chapter 14 - Activities Required in Completing a Quality Audit ANSWER:

(1) It is desirable to have a management representation letter in addition to the accumulated audit evidence to impress upon management its responsibility for the representations in the financial statements and to formally document the responses from the client to auditor inquiries about various aspects of the audit. It also helps reduce the possibility of misunderstanding concerning matters that are the subject of representations.

(2) The management representation letter is not very useful as audit evidence since it is a written statement from a nonindependent source. In effect, the client being audited makes certain representations related to the audit.

(3) Other types of information include: 1. Financial statements  Management's acknowledgment of its responsibility for the fair presentation in the financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP).  Management’s belief that the financial statements are fairly presented in conformity with generally accepted accounting principles (GAAP).

2. Completeness of information  Availability of all financial records and related data  Completeness and availability of all minutes or meetings of stockholders, directors, and committees of directors  Absence of unrecorded transactions 3. Recognition, measurement, and disclosure  Management’s belief that the effects of any uncorrected financial statement misstatements are immaterial to the financial statements  Information concerning fraud involving (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements  Information concerning related party transactions and amounts receivable from or payable to related parties  Unasserted claims or assessments that the entity’s lawyer has advised are probable of assertion and must be disclosed in accordance with FASB standards  Satisfactory title to assets, liens or encumbrances on assets, and assets pledged as collateral  Compliance with aspects of contractual agreements that may affect the financial statements 4. Subsequent events  Bankruptcy of a major customer with an outstanding account receivable at the balance sheet date  A merger or acquisition after the balance sheet date 5. Internal controls  Management’s acknowledgement of its responsibility for establishing and maintaining effective internal controls over financial reporting.  Management’s conclusion about the effectiveness of internal control over financial reporting as of the end of the fiscal period.  Disclosure to the auditor of all deficiencies in the design or operation of internal control over financial reporting identified as part of management’s assessment, including separate disclosure of significant deficiencies and material weaknesses.  Management’s knowledge of any material fraud or other involving senior management or other employees who have a significant role in the company’s internal control over financial reporting.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-08 - LO: 14-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Evaluating Management Representations Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit 177. 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.

ANSWER: The two types of subsequent events are Type I and Type II events. 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 178. Testing subsequent events List the audit procedures to be performed to determine if subsequent events have occurred and have been appropriately addressed.

The audit procedures performed when testing for subsequent events would include: ANSWER: Read the minutes of the meetings of the board of directors, ∙ stockholders, and other authoritative 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.

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Chapter 14 - Activities Required in Completing a Quality Audit POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 179. Type I subsequent events Provide two examples of a Type I subsequent event and explain how these events would be treated in the financial statements.

ANSWER: 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Subsequent Events 180. Type II subsequent events Provide two examples of a Type II subsequent event and explain how these events would be treated in the financial statements.

ANSWER: The instructor must review the student's responses, as they may vary.

Examples may include, but are not exclusive to: 1. Significant unrealized losses on securities held as investments.

2. Issuance of stocks, options, warrants and/or bonds.

3. Acquisition of subsidiary.

4. Public offering.

5. Entering into material agreements.

6. 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit TOPICS:

Reviewing Subsequent Events

181. Dual-dating opinions Describe the concept and the purpose of dual-dating an audit report.

ANSWER: Dual-dating the audit report reduces the auditor's responsibility. In normal situations, the auditor takes responsibility for all events up to the report release date. The auditor is responsible only for events that occurred after this date for which he or she has knowledge. If the auditor becomes aware of a subsequent event after the this 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 original report release date and the date of the subsequent event.

The advantage of dual dating the audit report is that the auditor limits their responsibility. The date for everything other than the subsequent event is the original report release date. 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-09 - LO: 14-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Reviewing Subsequent Events 182. Engagement Quality Review Morgan Thompson, CPA is a partner in a medium-sized CPA firm and takes an active part in the conduct of every audit she supervises. She follows the practice of reviewing all audit files of staff auditors on her team as soon as it is convenient, rather than waiting until the end of the audit. When the audit is nearly finished, Thompson reviews the audit files again to make sure that she has not missed anything significant. Because she makes most of the major decisions on the audit, there is rarely anything that requires further investigation.

When she completes the review, she prepares a draft of the financial statements, gets them approved by management, and has them assembled in her firm’s office. No other partner reviews the audit documentation, because Thompson is responsible for signing the audit reports.

REQUIRED: (1) Evaluate the practice of not having a concurring partner review of the audit documentation by another partner in the firm, (2) explain some of the procedures the reviewer should perform as part of the review process, and (3) what documentation should be included.

ANSWER: (1) By not having a review of the audit documentation by another partner in the firm, there is no check against any bias and unintentional error that may exist on the part of the auditor. An independent review is essential in this case. Such a review is required for public company audits.

(2) Some of the procedures the reviewer should perform as part of the review process include: Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit • Discussing with the audit team any significant matters related to the financial statements and internal controls, including the audit team’s identification of material weaknesses and audit procedures to address significant risks • Evaluating judgments about materiality and the disposition of corrected and uncorrected identified misstatements • Reviewing the engagement team’s evaluation of the firm’s independence in relation to the engagement • Reviewing the related audit documentation to determine its sufficiency • Reading the financial statements, management’s report on internal control, and auditor’s report • Confirming with the lead audit partner that there are no significant unresolved matters • Determining if appropriate consultations have taken place on difficult or contentious matters • Evaluating whether the auditor documentation supports the conclusions reached by the engagement team with respect to the matters reviewed • Assessing whether appropriate matters have been communicated to audit committee members, management, and other appropriate parties • Evaluating whether appropriate levels of supervision and reviews of individual audit tasks were completed adequately during the audit

(3) The audit documentation should include evidence on the performance of the engagement quality review. This documentation should include the following information: • Who performed the engagement quality review • Documents reviewed by the engagement quality reviewer • Date the engagement quality reviewer provided concurring approval of issuance

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-11 - LO: 14-11 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Performing an Engagement Quality Review 183. Management letters to clients What is a management letter and how does it differ from a management representation letter?

ANSWER: 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 advice 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-13 - LO: 14-13 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Communicating with Management via the Management Letter 184. Client Acceptance Newburg Company is in an industry in the early development stage, where there are minimal barriers to entry to the client’s business model. Newburg Company’s audit committee decided to put their 2014 audit out for bids.

One of the Big Four CPA firms had performed their audits from 2011-2013, and although happy with the Cengage Learning Testing, Powered by Cognero

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Chapter 14 - Activities Required in Completing a Quality Audit previous auditor, the audit committee believed they should rotate to another firm. On the last audit, the Big Four’s audit fees were $500,000. Barnaby, CPAs, came in as the low bidder, making a proposal to Newburg Company regarding audit fees for 2014. Their proposed audit fee was $250,000.

Required: (1) Based on this scenario, describe the ethical decisions that an auditor must make during portfolio management decisions such as the client acceptance and client continuance decision. What is the relationship between ethics and high audit quality?

(2) What issues should the client’s audit committee consider before going with the lowest bid?

ANSWER: (1) The ethical decisions that come into play during client acceptance and client continuance decisions concern the trade-off between audit fees, resulting audit effort, and the ability to conduct a quality audit. Given the fee data, one has to wonder whether Barnaby is going to do a quality audit in the year of the transition.

Is it possible to do a similar quality audit with half the resources? Perhaps the cost structure of Barnaby is much different than that of the Big Four firm. If Barnaby has lower fixed and overhead costs, and lower litigation reserves, then perhaps they can still earn the same relative profit on the engagement that the Big Four firm did.

Perhaps, the first year is considered a loss leader, as they gain experience with this new client. If not, then one must call into question whether the audit effort applied by the two audit firms was roughly equivalent. Since audit hours are not publicly disclosed, it is difficult to make a final determination. Ultimately, the ethical question is this: can an audit firm do a quality job with the audit fee that they are charging? And do they have the relative expertise necessary to make good audit judgments? If the answers to these questions is no, then there may be ethical problems in the acceptance or continuance of a relationship with a client.

(2) The quality of an audit helps ensure the financial integrity of the company’s financial health and protects assets, creditors and investors. Therefore, the audit committee should not approach this situation lightly. The decision regarding an audit firms with a strong culture of quality places greater emphasis on developing, maintaining, and monitoring systems of internal control that yield good decisions in this regard. The cheapest deal may not always be the best deal, particularly in the area of quality.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.14-14 - LO: 14-14 AUDT.JOHN.16.14-16 - LO: 14-16 NATIONAL STANDARDS: United States - BUSPROG: Communication United States - BUSPROG: Ethics TOPICS: Client Continuance Decisions Ethical Decision Making in Completing the Audit

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Chapter 15 - Audit Reports on Financial Statements 1. For the last several years, both the Financial Accounting Standards Board (FASB) and the International Auditing and Assurance Standards Board (IAASB) have been considering possible changes to the standard unqualified audit report. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 2. The audit report can be a verbal presentation to the audit committee about the client. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 3. There are no differences in audit report requirements across the standards of the AICPA, PCAOB, and IAASB. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 4. The auditor should only provide an opinion on the financial statements if the opinion indicates that the financial statements are fairly stated in all material respects. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements TOPICS:

Audit Reporting Principles

5. The audit report delineates the responsibility of client management and that of the audit firm. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 6. A client that has a departure from generally accepted accounting principles that is immaterial will receive a qualified or adverse opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 7. For some engagements, the financial statements might be audited in accordance with multiple auditing standards. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 8. When there is an uncertainty surrounding the financial statements, the auditor may still be able to give an unqualified opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Standard Unqualified Audit Reports

9. An important component of an audit report is that the title includes the word “competent.” a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 10. Andrews Corporation adopted an accounting principle that is a material departure from GAAP. The auditor determined that the financial statements are fairly presented, except for this specifically identifiable GAAP departure, and therefore would issue a disclaimer of opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 11. The audit report is modified to five paragraphs as a result of another audit firm performing part of the financial statement audit. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 12. A justified departure from GAAP will result in the issuance of an adverse opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 13. When financial statements contain generally accepted accounting principles in the current year that are different from the generally accepted accounting principles used in the preceding year, the auditor will typically make mention of it in the opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 14. After the balance sheet date but prior to the audit report date the client decides to acquire Bargain Company to obtain a significant increase in revenues. The auditor would probably give a report that includes the statement: "except for the acquisition of Bargain Company...". a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 15. An unqualified audit opinion with an explanatory paragraph often makes reference to the footnotes of the financial statements a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 16. The substantial doubt about an entity's ability to continue as a going concern is a phrase that is used in an unqualified opinion with a certain type of explanatory language. a. True b. False Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 17. Under international auditing standards, when the audit client has engaged other audit firms to audit remote locations around the country, the principal auditor must mention the other audit firms in the audit report. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 18. 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 19. The term "except for" is used in the opinion paragraph of an audit report that will be qualified for a GAAP violation that is not pervasive. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 20. A client that treats a material lease transaction as an operating lease when it is in fact a capital lease has deviated from GAAP and will receive a qualified or adverse opinion.

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Chapter 15 - Audit Reports on Financial Statements a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 21. 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 22. For a change in accounting principles that management does not justify to the auditor, the auditor will likely choose between a qualified and an adverse opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 23. Inconsistent application of accounting principles by the client is a GAAP violation and would result in a qualified audit report. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements 24. Uncertainties, such as doubt about the going concern of a client, may result in an adverse opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 25. If the auditor concludes that the financial statements taken as a whole are not fairly presented, the auditor should issue an adverse opinion. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 26. If scope limitations that are not client-imposed exist make it impossible for the auditor to form an opinion, the auditor should render an adverse opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 27. The failure of a client to include a statement of cash flows will result in the issuance of a disclaimer of opinion by the auditor. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements 28. When the auditor is unable to obtain sufficient, appropriate 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 29. The client will not allow Collier 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 30. 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 GAAP violation imposed by the audit firm. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 31. 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 32. An auditor can issue a disclaimer of opinion because of an inability to obtain sufficient appropriate evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 33. When circumstances preclude an auditor from performing certain procedures and the auditor can be satisfied using other alternative procedures, a disclaimer of opinion will be rendered. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 34. The scope paragraph of an unqualified opinion primarily provides information relating to the division of responsibilities. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 35. Because of its importance, the decision about what type of opinion to issue is often made after consultation with other professionals within the firm. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 36. If a significant scope limitation is imposed by the client, a disclaimer should ordinarily be issued. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 37. The most difficult decisions about which opinion to issue are generally centered around decisions based on the materiality level and pervasiveness of GAAP violations, the significance of scope limitations, and the likelihood of the entity being a going concern. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 38. The auditor is only concerned about the aggregate internal control deficiencies when determining the appropriate opinion on internal control over financial reporting (ICFR). a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit Reports on Internal Control over Financial Reporting 39. The auditor will issue an unqualified opinion on ICFR if the auditor has identified only one material weakness in ICFR. a. True b. False ANSWER: False Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit Reports on Internal Control over Financial Reporting 40. The auditor will modify the audit report on ICFR effectiveness when management's annual certification pursuant to Section 302 of the Sarbanes-Oxley Act is misstated. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit Reports on Internal Control over Financial Reporting 41. If the auditor determines that management’s annual report on internal controls is incomplete or not properly presented, the auditor’s report will include an explanatory paragraph that describes the reasons for this determination. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit Reports on Internal Control over Financial Reporting 42. The decision about whether to make reference to another auditor in the report on the audit of ICFR does not differ from the corresponding decision as it relates to the audit of the financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Audit Reports on Internal Control over Financial Reporting 43. Auditing reporting standards for financial statement and integrated audits require auditors to provide which of the following? a. Positive assurance. b. Negative assurance. c. Materiality assurance. d. No assurance.

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Chapter 15 - Audit Reports on Financial Statements ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 44. Which of the following is a change that is not being debated by auditing standard setters and investors? a. Adding disclosure about which engagement partner at the firm supervised the audit and who from outside the audit firm participated in the audit b. Adding commentary on areas of risk of material misstatement of the financial statements identified by the auditor. c. Adding commentary about the level of materiality applied by the auditor to perform the audit. d. All of the above are being debated.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 45. According to the AICPA, the auditor needs to form an opinion on the financial statements based on an evaluation of the audit evidence obtained. This is stated in which AICPA principle governing an audit conducted in accordance with GAAS? a. Principle 1 b. Principle 4 c. Principle 5 d. Principle 7 ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 46. According to the AICPA, the auditor needs to clearly express an opinion based on audit evidence obtained in the form of a written report.This is stated in which AICPA principle governing an audit conducted in accordance with GAAS? a. Principle 1 b. Principle 4 c. Principle 5 d. Principle 7 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 47. According to the AICPA principles, which of the following is incorrect? a. If the auditor has reservations about the fairness of financial statement presentation, the reason(s) must be stated in the auditor’s report. b. If there is a material departure from GAAP in the financial statements, the auditor should explicitly state the nature of the departure and the dollar effects where determinable. c. Auditors should state the reasons why an unqualified opinion cannot be issued. d. Auditors should issue an unqualified opinion in all cases where companies have provided an entire set of financial statements and footnotes that include all years presented for comparative purposes.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 48. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 49. 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 referred to above present fairly,..." d. "An audit includes examining, on a test basis..."

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 50. In which one of the following instances would an auditor most likely issue a standard unqualified opinion without explanatory language? 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 GAAP related to capitalizing repairs.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 51. The division of responsibility between the reporting company's management and the audit firm is described in which one of the following? a. Scope paragraph. b. Introductory paragraph. c. Notes to the financial statements. d. Opinion paragraph.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 52. If the auditor believes that there is a remote probability that resolution of an uncertainty will have a material effect on the financial statements, which of the following would the auditor issue? a. A disclaimer of opinion. b. A standard unqualified opinion. c. An adverse opinion. d. An unqualified opinion with explanatory paragraphs.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements 53. The scope paragraph of an unqualified opinion primarily gives information relating to which of the following? a. The division of responsibilities. b. The final assessment of a company’s standings with the audit firm. c. The statements and dates under audit. d. Audit planning and procedure.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 54. Audit reports are designed to promote clear communication between the auditor and the financial statement user. Which of the following is not delineated in the audit report? a. What was audited and the relative responsibilities of the client and the auditor. b. The experience level of the audit team. c. The nature of the audit opinion formulation process. d. The auditor’s opinion on the fairness of the financial statements.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Standard Unqualified Audit Reports 55. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 56. 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 do which of the following?

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Chapter 15 - Audit Reports on Financial Statements 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Report with Explanatory Language 57. When financial statements contain a material, unjustified departure from GAAP, which of the following is contained in the audit report? a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No. b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes. c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes. d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 58. When the financial statements contain a material departure from GAAP that the auditor believes is justified, where should the justification appear? a. In a footnote. b. In a paragraph added before the scope paragraph. c. In the opening paragraph. d. In a paragraph added before the opinion paragraph.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 59. Which one of the following is an instance where 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.

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Chapter 15 - Audit Reports on Financial Statements d. There is a material dollar misstatement in the financial statements.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 60. A client company has a history of negative cash flow trends and continuing losses. Which type of opinion will the auditor most likely issue? a. Adverse. b. Unqualified with explanatory language. c. Qualified. d. Disclaimer of opinion.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 61. When the auditor wishes to emphasize a matter in the financial statements, which of the following would the audit report contain? a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No. b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes. c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes. d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No. ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 62. When the auditor is unable to obtain sufficient appropriate evidence because the client did not allow a procedure to be completed, which of the following would the report most likely contain? a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No. b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes. c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes. d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No. ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 63. In the audit of consolidated financial statements under U.S. auditing standards 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. Introductory Paragraph: No; Scope Paragraph: No; Opinion Paragraph: Yes. b. Introductory Paragraph: No; Scope Paragraph: Yes; Opinion Paragraph: Yes. c. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: Yes. d. Introductory Paragraph: Yes; Scope Paragraph: Yes; Opinion Paragraph: No. ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 64. Which of the following would not result in an unqualified audit report with an explanatory paragraph? a. Going concern issue. b. Scope limitation. c. Emphasis of a matter. d. Consistency of presentation.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Report with Explanatory Language 65. How would the auditor categorize a situation when the financial statements do not contain a footnote the auditor believes is necessary for fair presentation? a. A scope limitation. b. An uncertainty. c. A departure from GAAP. d. An act discreditable.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements TOPICS:

Qualified Audit Reports

66. In which one of the following cases would an auditor most likely issue a qualified opinion? a. There is a highly material, and very pervasive departure from SFAS No. 141 and No. 142. 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 one material departure from GAAP that is affects only two accounts.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 67. Qualified opinions can only be issued by auditors for which of the following? a. Violations of GAAP. b. Scope limitations. c. Going concern. d. Lack of independence. e. Either A and B. ANSWER: e POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 68. Violations of GAAP resulting in qualified opinions affect the standard audit report through which of the following? 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 69. Which of the following is an example of circumstances that would not limit the audit scope?

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Chapter 15 - Audit Reports on Financial Statements a. An inadequacy in the accounting records. b. The inability to gather sufficient competent evidence. c. Emphasis of an important matter. d. The timing of the fieldwork.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 70. Which of the following phrases should not be used when the auditor is qualifying the audit opinion? a. Except for. b. Subject to. c. With the exception of. d. With the qualification of.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 71. If a client expensed the acquisition cost of some assets that should have been capitalized and depreciated them over their useful lives, which of the following would be incorrect? a. A qualified opinion would be appropriate. b. The opinion paragraph should be modified to include language such as: “except for the effects of not capitalizing the acquisition costs of some assets...” c. An explanatory paragraph should include the effects of the subject matter of the qualification, where practicable. d. An explanatory paragraph should be modified to include language such as: “subject to the qualified act...”

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 72. Adverse opinions can only be issued by auditors based on which of the following? a. Violations of GAAP. b. Scope limitations.

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Chapter 15 - Audit Reports on Financial Statements c. Going concern. d. Lack of independence. e. Either B or D. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 73. Adverse opinions affect the standard audit report in which of the following ways? 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.

ANSWER: e POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 74. The opinion paragraph of the audit report for Schnook Co. states that the financial statements "do not present fairly". Which type of audit report is this? a. Improper. b. Adverse. c. Disclaimer. d. Qualified.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 75. An audit of the Flagler 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.

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Chapter 15 - Audit Reports on Financial Statements d. Unqualified with explanatory language.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 76. In which one of the following instances would an auditor most likely 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 overall financial statements. d. The client does not allow the auditor to send confirmations to its three largest customers.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 77. When an auditor is faced with a material departure from GAAP that is pervasive, which of the following should the audit report contain? a. An unqualified opinion. b. A qualified opinion with an explanatory paragraph. c. An adverse opinion. d. A disclaimer of opinion.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 78. In which of the following circumstances would an auditor be most likely to express an adverse opinion on a company’s financial statements? a. The client has had significant transactions with related entities that the auditor wants to emphasize. b. The financial statements are not in conformity with FASB requirements regarding the capitalization of leases. c. The auditor is not independent. d. There is substantial doubt about the entity’s ability to continue as a going concern.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 79. When an auditor issues an adverse opinion, which of the following should be included in the opinion paragraph? a. The financial statement effects of the departure from GAAP. b. A statement that indicates that the financial statements are fairly stated except for a reason that is described in the separate paragraph. c. A reference to a separate paragraph that describes the reason for the adverse opinion. d. The reasons that the financial statements are misleading.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 80. 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 81. 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.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements TOPICS:

Audit Reports with a Disclaimer of Opinion

82. When an auditor lacks independence with respect to a client, which of the following should the auditor issue? a. A disclaimer of opinion. b. An adverse opinion. c. A qualified opinion with explanatory paragraph. d. An unqualified opinion.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 83. When the auditor is not independent with respect to a client, what must the auditor do? a. Not accept an audit 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 to the AICPA. ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 84. Disclaimers of opinion can only be issued by auditors based on which of the following? a. Violations of GAAP. b. Substantial scope limitations. c. Going concern. d. Lack of independence. e. Either B or D. ANSWER: e POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 85. Scope limitations resulting in disclaimers under U.S. auditing standards affect the standard audit report through which of the following?

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Chapter 15 - Audit Reports on Financial Statements 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.

ANSWER: e POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 86. A justified departure from GAAP may result in which of the following? a. A disclaimer of an audit opinion. b. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph. c. An adverse opinion. d. A qualified opinion.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 87. A justified departure from GAAP may result in which of the following? a. A disclaimer of an audit opinion. b. An adverse opinion. c. An unqualified audit opinion with an explanatory paragraph before the opinion paragraph or a qualified opinion. d. A standard unqualified opinion.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 88. An emphasis of a matter may result in which of the following? a. A disclaimer of an audit opinion. b. A qualified audit opinion.

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Chapter 15 - Audit Reports on Financial Statements c. An adverse opinion. d. An unqualified audit opinion with an explanatory paragraph either before or after the opinion paragraph.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 89. A reference to another auditor under U.S. auditing standards may result in which of the following? a. A disclaimer of an audit opinion. b. A qualified audit opinion. c. An adverse opinion. d. An unqualified audit opinion with modified wording for all three paragraphs.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 90. When might an auditor modify the introductory paragraph and replace the scope paragraph with explanatory paragraph? a. When a scope limitation exists. b. When there is substantial doubt about going-concern. c. When the auditor lacks independence. d. When there is an emphasis of a matter.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-07 - LO: 15-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Comparisons of Modifications to the Standard Unqualified Audit Report 91. PCAOB Auditing Standard 5 does not identify which of the following situations as one in which the auditor will modify the audit report on ICFR effectiveness? a. When there is a restriction on the scope of the engagement. b. When there is other information contained in management's annual report on ICFR. c. When elements of management's annual report on internal control are incomplete or improperly presented. d. When the annual report includes a copy of the annual certification pursuant to Section 302 of the Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements Sarbanes-Oxley Act. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control over Financial Reporting 92. When there is a restriction on the scope of the internal control over financial reporting (ICFR) engagement, what should the auditor do? a. The auditor will either withdraw from the engagement or disclaim an opinion. b. The auditor will issue an adverse opinion. c. The auditor will issue an opinion on the ICFR based on another audit firm’s work. d. The auditor will report this directly to the Treadway Commission.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control over Financial Reporting 93. In which of the following situations would the auditor modify the audit report on ICFR? a. When the auditor relies on the work of other auditors but decides not to include a reference to the other auditors. b. When the auditor is unable to perform all procedures needed to evaluate the internal controls. c. When the auditor concludes that management’s report on ICFR is not complete or is improperly presented. d. When the auditor identifies multiple unrelated significant deficiencies in ICFR. ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control over Financial Reporting 94. When management chooses to include information in its report on ICFR that is in addition to the information required to be provided, what should the auditor do? a. The auditor must endorse the information. b. The auditor must include the information as part of the opinion. c. The auditor will disclaim an opinion on that additional information. d. The auditor will present the information in a separate schedule in the footnotes.

ANSWER: c Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-08 - LO: 15-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports on Internal Control over Financial Reporting 95. Types of Audit Opinions What are the five basic types of financial statement audit reports?

ANSWER: Audit reports can be: 1. Standard unqualified report 2. Unqualified report with an explanatory paragraph 3. Qualified report 4. Adverse report 5. Disclaimer of opinion report POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-01 - LO: 15-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reporting Principles 96. Types of Audit Opinions Aloe Products is an online retailer of lotions and other beauty supplies. The company records revenues at the time that the customer orders are placed on the website, rather than when goods are shipped. Goods are typically shipped two days after the order is places. The auditor determines that the amount of orders placed but not shipped as of the balance sheet date is not material.

REQUIRED: Which type of audit report would you suggest be issued and why?

ANSWER: Although the client is not following GAAP on revenue recognition, the amount is immaterial. Therefore, the standard unqualified report would be the most probable type of report to issue.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Standard Unqualified Audit Reports 97. Types of Audit Opinions A CPA, engaged in the audit of financial statements of a large manufacturer with branch offices that are widely dispersed, is not able to count the substantial undeposited cash receipts at the close of business on the last day of the fiscal year at all branches. As an alternative to this procedure to verify the accurate cutoff of cash receipts, Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements the CPA observes that deposits in transit as shown on the year-end bank reconciliation appeared as credits on the bank statement on the first business day of the New Year. Based on this, the auditor was satisfied as to the cutoff of cash receipts.

REQUIRED: Which type of audit report would you suggest be issued this year and why?

ANSWER: Because the auditor was able to obtain alternative evidence, no scope qualification is necessary. If there were such a qualification, it would be a qualified scope and opinion or a disclaimer, depending on materiality. However, in this case, it appears as if an unqualified opinion with standard wording is most likely.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Standard Unqualified Audit Reports 98. Unqualified audit reports For each of the following situations, define the type of problem encountered and provide an explanation as to the type of report which was issued.

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 regarding the client's ability to Unqualified with Explanatory Paragraph continue as a going concern.

The client properly adopts a new accounting principle promulgated by the Unqualified with Explanatory Paragraph FASB ANSWER: Type of Problem Issues Giving Rise to Report Alternative procedures probably Scope limitation performed.

Most likely immaterial or the client GAAP violation adjusted the financial statements to appropriately reflect the contingency.

Probably not a significant enough Going concern uncertainty to give rise to disclaimer.

Change in accounting principle in Adequate GAAP treatment. Auditor accordance with GAAP. draws attention to the change.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-02 - LO: 15-02 AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Standard Unqualified Audit Reports Unqualified Audit Reports with Explanatory Language

99. 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?

ANSWER: 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 GAAP. ∙ A justified departure from GAAP. 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 GAAP the explanatory paragraph can go before or after the opinion paragraph.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Unqualified Audit Reports with Explanatory Language 100. Types of Audit Opinions A CPA has completed an audit of the financial statements of a long-haul trucking company for the year ended December 31, 2014. Prior to 2014, the company depreciated its trucks over 10 years. However, during 2014, the company determined that a more realistic estimated life for its trucks was 8 years and computed the 2014 depreciation on the basis of the revised estimate. The CPA is satisfied that the 8 year estimate is reasonable, but the change will have a material effect on the comparability of the company’s financial statements. The company adequately disclosed the change in estimated useful lives of its trucks and the effect of the change on 2014 income in a note to the financial statements.

REQUIRED: Which type of audit report would you suggest be issued on the 2014 financial statements and why?

ANSWER: The auditor should issue an unqualified standard audit report with an explanatory paragraph following the opinion paragraph without modifying the three standard paragraphs. This is because there is a lack of consistency, since there is a change of estimated life that results in a material effect as far as comparability and is not a change in accounting principles. As the scenario notes, adequate disclosure is provided.

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Chapter 15 - Audit Reports on Financial Statements POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Unqualified Audit Reports with Explanatory Language 101. Types of Audit Opinions Bacon, CPAs, is the principal auditor for Martin Industries, a U.S. public company. However, Bacon decides to refer to the work of Hsu and Wen, CPAs, who audited a wholly owned subsidiary of the entity and issued an unqualified opinion.

REQUIRED: Which type of audit report would you suggest be issued this year and why?

ANSWER: Since the principal audit firm chooses to mention the other firm in the audit report, the wording of the standard unqualified report is modified, and no additional paragraph is needed. The resulting opinion is unqualified unless there are other reasons for expressing a different opinion. The most extensive change appears in the introductory paragraph to indicate the shared responsibility for the overall opinion, including the magnitude of the amounts audited by the other firm. The scope and opinion paragraphs are also modified to reference the other auditor.

For nonpublic clients, the extensive change would appear in the auditor’s responsibility section; and the opinion paragraph would include a reference to the other auditor.

The name of the other audit firm is mentioned only with its express permission and if its report is also included in the document.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Unqualified Audit Reports with Explanatory Language 102. Types of Audit Opinions 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 of a U.S. company.

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 2. fieldwork.

3. 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 4. asset.

The client does not record impairment of goodwill and will not depreciate property 5. and equipment. Both are considered very material.

6. There is substantial doubt about the client's ability to continue as a going concern.

ANSWER: Qualified or Disclaimer of opinion (although most auditors will disclaim a 1. client imposed scope limitation).

1.

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Chapter 15 - Audit Reports on Financial Statements 2.

3.

4.

5.

6.

Disclaimer of opinion for the auditor's impaired independence.

Qualified opinion because of the GAAP violation that does not overshadow the remainder of the financial statements.

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 explanatory paragraph. In some reporting situations, doubt about the client continuing as a going concern is such that the auditor does not believe that an additional paragraph to an unqualified opinion is appropriate.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-03 - LO: 15-03 AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports Audit Reports with a Disclaimer of Opinion 103. Qualified opinions Under what circumstances would an auditor issue a qualified opinion?

ANSWER: 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: There is a material, unjustified departure from GAAP, but the auditor believes that the financial statements taken as a whole are fairly presented except for this ∙ specifically identifiable GAAP departure. Not overshadowing to the remainder of financial statement.

Management's disclosures are not adequate, but the lack of disclosure is not ∙ pervasive.

The auditor has conducted the audit and is unable to obtain sufficient ∙ appropriate evidence on a particular area because of scope limitations or the lack of such evidence. (Not significant enough to render disclaimer of opinion).

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Qualified Audit Reports 104. Types of Audit Opinions On January 2, 2014, the Zoom Detail Shoppe received notice from its primary supplier that all wholesale prices were being increased by 10%, effective immediately. Based on this notice, Zoom revalued is December 31, 2013 inventory to reflect the higher costs. The inventory is a large proportion of the total assets. The effect of the revaluation was material to current assets, but not to total assets or net income. The increase is adequately Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements disclosed in the footnotes.

REQUIRED: Which type of audit report would you suggest be issued this year and why?

ANSWER: This is a failure to follow GAAP and a qualified opinion should be issued. Zoom Detail Shoppe has used a replacement cost inventory approach rather than a lower of cost or market approach. It is most likely not sufficiently material to require an adverse opinion.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Qualified Audit Reports 105. Types of Audit Opinions Subsequent to the date of the financial statements, as part of post-balance sheet date audit procedures, a CPA learned that a recent fire caused significant damage to one of the client’s two manufacturing facilities. However, the loss will not be reimbursed by insurance. Newspapers in the area describe the event in detail and the event is widely known. The financial statements and related notes as prepared by the client did not disclose the fire loss.

REQUIRED: Which type of audit report would you suggest be issued this year and why?

ANSWER: Disclosure of this information is required in a footnote. According to the information, this event is highly material or material, depending upon the amount of the loss and the auditor's preliminary judgment about materiality. Failure to disclose the event is a violation of GAAP and is likely to result in a qualified opinion, or it could be so material that it requires an adverse opinion.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Qualified Audit Reports Adverse Audit Reports 106. Types of Audit Opinions For the past five years, Clark CPAs has audited the financial statements of a manufacturing company. During this period, the audit scope was limited by the client as to the observation of the annual physical inventory.

Because Clark CPAs considers the inventories to be material and was not able to satisfy the audit requirements by using other auditing procedures, the firm was unable to express an unqualified opinion on the financial statements in each of the five years.

The CPA was allowed to observe physical inventories for the current year ended December 31, 2014, because the client’s bank would no longer accept the audit reports. However, to minimize audit fees, the client requested that the CPA not extend audit procedures to the inventory as of the beginning of the year, January 1, 2014.

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Chapter 15 - Audit Reports on Financial Statements REQUIRED: Which type of audit report would you suggest be issued this year and why?

ANSWER: The scope of the audit has been restricted by inability to assess the inventory.

Based on the information, this appears to be highly material or material, depending upon the auditor’s preliminary judgment about materiality. Because the auditor was unable to obtain sufficient appropriate evidence on the beginning inventories, it would be necessary to issue either a qualified or disclaimer of opinion on the income statement and statement of cash flows as well as the beginning of the year balance sheet. The choice of a qualified or disclaimer opinion would depend upon materiality. If highly material, then a disclaimer is the best choice. If material, then a qualified scope and opinion might be more appropriate. An unqualified opinion could be issued for the current period balance sheet.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-04 - LO: 15-04 AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Qualified Audit Reports Audit Report with Disclaimer of Opinion 107. Adverse opinions Under what circumstances would an auditor issue an adverse opinion?

ANSWER: 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 GAAP that pervade the financial statements. a lack of important disclosures that is pervasive, as this is a departure from ∙ GAAP. The GAAP deviation is typically pervasive to the entire financial statement when an adverse opinion is issued.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-05 - LO: 15-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Adverse Audit Reports 108. Disclaimers Discuss what a disclaimer is, when it is issued, and how it would affect the format of a standard three paragraph audit report.

ANSWER: 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 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Audit Reports on Financial Statements performed no procedures and provides no assurances on the financial statements.

In some cases, a disclaimer will be issued when there is substantial doubt about the client being a going concern.

When the CPA is not independent of the client, professional standards forbid any expression of assurance by the auditor on the financial statements. 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 the financial statements 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Reports with a Disclaimer of Opinion 109. Types of Audit Opinions During the course of an audit of the financial statements of Glover Industries, a CPA is refused permission to inspect the minutes from the board of directors meetings. The CPA is instead offered a certified copy of all resolutions and actions involving accounting matters.

REQUIRED: Which type of audit report would you suggest be issued this year and why?

ANSWER: The auditor should issue a disclaimer of opinion. Failure of the client to allow the auditor to inspect the minutes of board meetings would be a material clientimposed restriction. Due to the importance of the minutes, a disclaimer would be necessary. The certified copy of all resolutions and actions is not a satisfactory alternative procedure.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.15-06 - LO: 15-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Audit Reports with a Disclaimer of Opinion Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 1. The significant judgments of “Assets of Held-for-Sale Operations” are subject to impairment testing based on the most likely sale or disposal price. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 2. Complex audit judgments and decisions often involve accounts that require subjective estimates by management. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 3. The inventory account does not require any subjective estimates by management. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 4. Auditors are not responsible for making judgments regarding the fair value of securities. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 5. Auditors are constantly challenged to evaluate the quality of a client’s estimates, including areas such as obsolescence of inventory, allowance for doubtful accounts, and tax provisions among others. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 6. Auditor needs to assess disclosures about what lines of business the company may discontinue. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 7. There are systematic processes that the auditor can use in making most of the complex judgments in the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 8. The significant judgments related to “net finance receivables” include assessing the allowance for noncollectibility. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 9. The significant judgments related to "deferred income taxes" are subject to estimates of future profitable operations against which the deferred asset might be utilized. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 10. Existing professional guidance notes that auditors must make materiality assessments for purposes of (1) audit planning and (2) evidence evaluation after audit procedures are completed. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 11. An auditor’s consideration of materiality is a matter of professional judgment and is influenced by the auditor’s perception of the needs of users of financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 12. Materiality judgments are made in light of the surrounding circumstances, but need not necessarily involve both quantitative and qualitative considerations. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Materiality judgments

13. The purpose of making materiality judgments is to make sure that financial statements are free of any material misstatement. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 14. The auditor considers materiality only at the overall financial statement level. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 15. Auditors make materiality assessments to help in planning the audit evidence to obtain and in evaluating the audit evidence that was obtained. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 16. Determining materiality is based solely on quantitative factors. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Materiality judgments

17. If the auditor believes that misstatements aggregating approximately $50,000 would be material to the income statement, but misstatements aggregating approximately $100,000 would be material to the balance sheet, the auditor typically assesses overall materiality at $100,000 or less. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 18. Planning materiality helps the auditor determine the extent of audit evidence needed in order to provide an opinion on the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 19. In performing substantive analytical procedures, the threshold for determining whether differences between the client’s recorded balance and the auditor’s expectation should be based on planning materiality. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 20. If a company’s net income varies significantly from year to year, the auditor might consider using an average of the net income from the prior three to five years as the materiality benchmark. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 21. The accumulation of which potential misstatements to accumulate for the purpose of assessing the materiality of misstatements is often based on whether items are considered clearly trivial. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 22. A materiality level where the auditor believes that the errors below that level would not, even when aggregated with all other misstatements, be material to the financial statements is often based on whether something is considered clearly trivial. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 23. Auditors may consider only quantitative effects and not qualitative effects in making materiality judgments. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 24. Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 25. The auditor need not inform the audit committee about adjustments arising from the audit that were considered to be material. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 26. The assessment as to whether a misstatement in a cash-flow classification is material should be primarily based on an income statement perspective. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 27. Auditors request the client to book all known misstatements, even if the recording cost is very high so that there are no carryovers from year to year. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 28. The SEC’s position is generally that if management refuses to correct a material misstatement, then the Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments auditor is obligated to issue a qualified or an adverse opinion on the financial statements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 29. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the effectiveness of the client’s internal control over financial reporting. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 30. The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 31. The SEC issued SAB 108 in 2006, which mandates what is termed a dual approach to assessing uncorrected misstatements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 32. A misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is unintentional. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 33. When evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 34. Auditors can choose to test the client’s warranty reserves using primarily tests of controls and substantive analytical procedures. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities 35. When auditing pension obligations, the auditor will likely use a specialist to assist the audit team. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments TOPICS:

Audit Considerations for Long-Term Liabilities

36. Goodwill is the excess of the purchase price over the fair market value of the acquired company’s tangible assets, identifiable intangible assets, and liabilities. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 37. Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 38. Goodwill has to be evaluated for impairment once a year, as well as on an interim basis as the time events and circumstances warrant. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 39. If the market value of the reporting unit is below book value and a significant amount of goodwill exists, the presumption is that there has been an impairment of goodwill. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 40. Goodwill arising from many acquisitions can be netted into one test at the company level. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 41. If restructuring charges are not calculated correctly, the charges can be used to fraudulently manipulate income. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 42. In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 43. When assessing fair value of Level 2 assets, auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence. a. True b. False ANSWER: False POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 44. Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 45. Audits of Level 3 assets are the most straightforward as they involve an observable, active market. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 46. Assuming that other assets have been properly valued, if the market value of the reporting unit is equal to the carrying value of the assets of the reporting unit, the presumption is that goodwill has been impaired. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 47. Current FMV of assets and liabilities of non-goodwill assets is one of the factors affecting goodwill impairment valuations. a. True b. False ANSWER: True Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 48. A sensitivity analysis of changes in value based on industry and cash-flow assumptions is one of the aspects of the audit program for goodwill impairment testing. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 49. While performing goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, the approach would be to determine whether all other assets have been adjusted to fair value, where applicable. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 50. U.S. accounting standards require organizations to use a two-step process to determine the impairment of goodwill. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 51. An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets. a. True Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 52. When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-07 - LO: 16-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit considerations for financial instruments 53. When auditing financial hedges, the auditor should understand the product, identify relevant risks and controls, and understand the appropriate accounting. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-07 - LO: 16-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit considerations for financial instruments 54. The significant judgments related to debt depend on specific accounting rules (U.S. or international) that the company is following. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-07 - LO: 16-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit considerations for financial instruments 55. The volume of transactions affected is one of the critical criteria in assessing identified internal control Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments deficiencies. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 56. Evidence of fraud, whether or not material, on the part of senior management, would likely cause the auditor to conclude that the client had a material weakness in internal control over financial reporting. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 57. A compensating control would not be considered as a factor that could mitigate a potential material weakness. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 58. In the U.S. a CPA firm can provide both internal and external audit services for the same public company client. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 59. Independence of the internal audit function is obtained by giving the Chief Audit Executive (CAE) unrestricted access to the board and senior management. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 60. Internal auditors can perform both consulting services and assurance services. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 61. All internal auditors are required to have the CIA designation in order to practice internal auditing. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 62. Which of the following is subject to fair value assessment? a. Marketable securities. b. Inventory. c. Property that will be sold. d. All of the above could require fair value adjustments.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments TOPICS:

Complex Audit Judgments

63. Which of the following is least likely to require significant auditor judgment about the dollar amount to be disclosed in the financial statement? a. Contingent liability related to pending litigation. b. Assumptions made in preparation of the estimate of income tax expense for the year. c. The value of inventory. d. Cash on hand at the end of the year.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 64. Which of the following statements best describe an issue related to inventory? a. Impairment testing based on most likely sale or disposal price. b. Subject to allowance for noncollectibility. c. Lower of cost or market impairments, including an allowance for obsolescence. d. Subject to estimates made regarding the expected life of the assets and the appropriateness of the depreciation method.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 65. Which of the following best describes the nature of assets of held-for-sale operations? a. Impairment testing based on most likely sale or disposal price. b. Impairment testing if plants are closed or equipment is not used. c. Lower of cost or market impairments, including an allowance for obsolescence. d. Estimates and assumptions made in preparation of the estimate of income tax expense for the year.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 66. Almost every asset and liability account requires significant judgments. Which of the following judgments is subject to allowance for noncollectibility?

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments a. Inventories. b. Marketable securities. c. Other receivables. d. Deferred revenue.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-01 - LO: 16-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Complex Audit Judgments 67. In which of the following cases is it not necessary for an auditor to revise the original materiality level and document the new materiality amount, as well as the rationale for changing the amount? a. If there is a change in circumstances that involve laws, regulations, or the accounting framework. b. If there is new information resulting from the risk assessment of the client. c. If there are changes in the understanding of the client about a new contractual agreement. d. If the client plans to change depreciation methods for new plant assets procured in the future.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 68. What document is prepared so that auditors can aggregate potential misstatements in order to assess the materiality of misstatements? a. The audit opinion. b. The summary of unadjusted audit differences. c. The summary of earnings trends. d. The post-closing trial balance.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 69. Which of the following statements is not true regarding the use of a judgmental approach by auditors in determining whether a misstatement is clearly trivial? a. The determination is based on past auditor experience. b. The determination is usually not very defensible to third-party users. c. The determination is usually not very defensible to regulators.

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments d. The determination uses percentages for the likelihood of misstatement.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 70. Which of the following will the auditor will not consider when making a materiality determination? a. Potential default on loan covenants. b. Changes in segment earnings or trends in earnings. c. Factors that would affect the market’s perception of future growth and cash flow for the company. d. All of these insights would be considered.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 71. Which of the following would not be a reason to lower the threshold for materiality? a. The auditor is concerned with potential violations of debt covenants. b. There were proposed adjusting entries to a particular account in prior years. c. The consequences of a potential misstatement in an account balance are very high. d. The audit team wants to limit the amount of time spent at the client’s facilities.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 72. Performance materiality helps the auditor to determine which of the following? a. Extent of audit evidence needed. b. The specific analytical procedures to perform. c. The specific substantive procedures to perform. d. Control risk assessment.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Materiality Judgments

73. Although different audit firms take different approaches, performance materiality could be the same as overall materiality, or could be a percentage of overall materiality. Generally this range is which of the following? a. 25% to 75% of overall materiality. b. 50% to 75% of overall materiality. c. 25% to 50% of overall materiality. d. 40% to 75% of overall materiality.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 74. When a client has significant and nonrecurring charges to nonoperating expenses, which of the following would be the most appropriate materiality benchmark? a. Net profit. b. Income from continuing operations. c. Cash inflows. d. Cash outflows.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 75. For nonprofit entities, appropriate benchmarks for materiality judgments would include which of the following? a. Total assets and total liabilities. b. Total revenues and total assets. c. Total liabilities, total income, or total assets. d. Total expenses, total revenues, or total assets.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 76. Which of the following statements is not true about materiality judgments? a. The auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of users of financial statements. b. The auditor considers materiality only in relation to classes of transactions, account balances, and disclosures. c. Materiality judgments are used to help the auditor gather sufficient appropriate evidence about whether the financial statements are free of material misstatement. d. Materiality decisions differ from one audit client to another.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 77. Which of the following statements is false regarding materiality judgments? a. Materiality judgments are a matter of professional judgment. b. Materiality judgments depend on the needs of a reasonable person (an investor, potential investor, or other stakeholder) relying on the information. c. Materiality judgments involve both quantitative and qualitative considerations. d. Materiality judgments are easy for auditors to make.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments 78. Which of the following is not a factor adding to the complexity of materiality judgments made by auditors? a. Regulators pay particular attention to the judgmental aspects of auditor materiality decisions. b. SEC regulators do not believe it is appropriate to use percentage terms to substitute for a full analysis of all relevant considerations regarding the magnitude of misstatement. c. Regulators focus on how materiality decisions can affect client financial results. d. SEC regulators have few requirements for auditors to comply with since the AICPA fills that role.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality Judgments Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 79. Which of the following is an approach used to determine posting material? a. Dual approach. b. Percentage approach. c. Qualitative approach. d. Planning approach.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 80. According to SAB 108, what approach is used when assessing uncorrected misstatements? a. Matrix approach. b. Dual approach. c. Percentage approach. d. Judgmental approach.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 81. Misstatements detected during the audit that were initially deemed to be immaterial must be summarized to determine which of the following? a. Materiality. b. Quantitative effect. c. Aggregate effects. d. Nature of misstatement.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 82. The adjustments arising from the audit that were considered to be material should be communicated by the auditor to which of the following? a. Audit staff. b. Management. c. Audit committee.

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments d. Internal auditors.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 83. The auditor should have a sound basis, supported by objective evidence, regarding accounting estimates and should not fall victim to an “all estimates are subjective” argument in order to waive which of the following? a. Contingent liability. b. Material misstatements. c. Unrecorded liability. d. Material adjustments.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 84. Which method focuses on the materiality of current year misstatements and the reversing effect of prioryear misstatements on the income statement? a. Rollover method. b. Iron curtain method. c. Percentage approach. d. Judgmental method.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 85. Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years? a. Rollover. b. Iron curtain. c. Dual. d. Percentage.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 86. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the effectiveness of which of the following? a. The client’s external controls. b. The client’s interim financial statements. c. The client’s internal controls over financial reporting. d. The client’s segment reports.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 87. Which of the following is required by the dual approach for assessing uncorrected misstatements? a. The application of the rollover method. b. The application of the iron curtain method. c. Simultaneous application of both the rollover and iron curtain methods. d. Sequential application of both the rollover and iron curtain methods.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 88. Which of the following is not a long-term liability account with a high risk of material misstatement? a. Warranty reserves. b. Pension obligations. c. Other postemployment benefits. d. Marketable securities.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 89. Which of the following is not a key type of evidence that the auditor needs to examine with respect to pensions and postemployment benefits? a. Whether the actuarial firm hired by management is independent, capable, and objective. b. The appropriateness of the actuarial firm’s work. c. The reasonableness of significant interest rate assumptions. d. The length of illnesses that pension recipients contract.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities 90. Which of the following is not an element of pensions and other postemployment benefits that is difficult to estimate? a. Projected lifetime of former employees that will receive a pension. b. The future earnings of employees prior to retiring for defined benefit plans. c. Long-term interest rates to discount future costs back to present value. d. Current amounts earned on pension plan assets.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities 91. Which of the following factors would be least likely to affect the estimate of the warranty liability? a. Changes in the product. b. Changes in the nature of the warranty. c. Changes in the sales staff. d. Changes in sales volume.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities 92. An audit of the other postemployment benefits does not require estimates with respect to which of the following? a. Changes in medical expenses. b. Changes in coverage.

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments c. Changes in average life expectancies. d. Changes in Human Resource personnel in charge of postemployment benefits.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-04 - LO: 16-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Long-Term Liabilities 93. If an acquired company remains intact after it has been acquired, it is defined as which of the following types of segments? a. Financing segment. b. Investing segment. c. Operating segment. d. Non-operating segment.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 94. Which of the following is not a significant challenge related to valuation issues for audits of merger and acquisition transactions? a. Valuing the assets upon acquisition. b. Valuing the liabilities upon acquisition. c. Measuring restructuring charges. d. Measuring the qualifications of personnel from the acquired company.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 95. Which one of the following is not an audit procedure used when testing restructuring charges? a. Review current and proposed financial accounting standards to determine if changes have occurred in accounting for restructuring. b. Evaluate the qualifications of management. c. Mathematically test the estimates. d. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or estimates from investment bankers, and (c) severance contracts.

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 96. Which of the following is false regarding the valuation of goodwill? a. U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit. b. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit. c. Goodwill is tested for impairment quarterly. d. Goodwill is the excess of the purchase price over the fair market value of the acquired company’s tangible assets, identifiable intangible assets, and liabilities.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Merger and Acquisition Activities 97. Which of the following approaches for determining fair value of Level 3 assets is used by the auditor? a. Determining appropriate model and sensitivity of model. b. Reviewing contracts to determine if loss is other than temporary. c. Performing an analysis of volume of trading activity. d. Performing an analysis of trades on similar assets.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 98. Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets? a. Determining identical assets and active markets. b. Assessing client methodology and cash flows to originally estimate value. c. Determining appropriate model and inputs expected cash flows. d. Determining similar assets and relevant markets.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 99. Which of the following should the client have as part of its process for estimating fair value? a. A systematic process to identify each asset that is subject to realizable value estimation. b. A process to identify relevant historical values. c. An analysis of transactions that have taken place within the client’s organization. d. A realistic process to estimate future cash flows to discount back to a present value.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 100. In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1? a. Observable information on similar items. b. Nonexistence of active markets. c. Quoted prices on identical items. d. Relevant economic and industry factors.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 101. In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets? a. The correspondence of the client’s assets to similar assets in an active market. b. Contingent liabilities. c. Sensitivity of model used for marking to model. d. The performance of tests of controls.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 102. Which one of the following statements is not accurate about goodwill impairment valuations?

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments a. Goodwill arising from acquisitions can be netted into one test at the operating segment level, but not netted at the company level. b. Market valuation may be volatile. A temporary decline in market value may not be a good indicator of FMV. c. FMV might not exist, might require independent appraisals by investment bankers or estimates using cash flow and discounted present value factors. d. No assumptions are required about competition, economic development, product placement, and so forth.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 103. Impairment is measured by the difference between market value of the operating segment and which of the following? a. Carrying value of net assets. b. Fair market value of net assets. c. Book value of total assets. d. Book value of current assets.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 104. In a standard audit program for goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, which approach should the auditor take? a. Compare market value with carrying value. A market value less than carrying value is presumptive evidence that goodwill has been impaired. b. Compare fair value with realizable value. A fair value less than realizable value is presumptive evidence that goodwill has been impaired. c. Compare book value with realizable value. A book value less than realizable value is presumptive evidence that goodwill has been impaired. d. Compare book value with market value. A market value less than book value is presumptive evidence that goodwill has been impaired.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Audit Considerations for Fair Value and Impairment

105. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 3? a. Quoted prices for identical items in active, liquid, and visible markets. b. Unobservable inputs to be used in illiquid situations. c. Observable information for similar items in active or inactive markets. d. Unobservable inputs to be used in situations where markets do not exist.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 106. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective? a. Level 0. b. Level 1. c. Level 2. d. Level 3.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 107. The FASB has set a hierarchy of inputs to consider in assessing fair value. Price taken from a recent trade on the NIKKEI of an index stock would fall under which level? a. Level 0. b. Level 1. c. Level 2. d. Level 3.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments 108. Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value? a. Mark to market model. b. Replacement model. c. Mark to model. d. Historical cost model.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 109. Under which of the following approaches is the client expected to estimate fair value based on a model of the future cash flows associated with the instrument or the asset? a. Mark to market model. b. Replacement model. c. Mark to model. d. Historical cost model.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 110. Which one of the following general factors would not be considered when assessing identified internal control deficiencies? a. Control environment. b. Audit evidence from a poorly controlled system. c. Repeatability of a process. d. Complexity and subjectivity of the account balance affected by the deficiency.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 111. Material misstatements in the financial statements, including those requiring restatements strongly imply a material weakness in which of the following? a. Income statement.

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments b. Balance sheet. c. Internal control over financial reporting. d. Cash flow statements.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 112. Which of the following factors can mitigate concerns that the auditor might otherwise have about a material weakness that was identified at an interim date? a. Remediation of the control deficiency after the interim date. b. Existence of a compensating control at the year-end date that was also present at the interim date. c. Weaknesses in the control environment. d. Ineffectiveness of oversight and governance.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 113. Which of the following factors is not relevant when assessing identified internal control deficiencies? a. Weaknesses in the control environment. b. The absence of a material misstatement in the financial statements. c. Volume of transactions affected by the deficiency. d. Effectiveness of oversight/governance.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 114. Which of the following reflects the scope of services performed in external auditing by a CPA? a. Risk analysis. b. Control analysis. c. Operations analysis. d. Audits of financial statements.

ANSWER: d Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 115. Which of the following is not included in the scope of services performed in internal auditing by a CIA? a. Assurance and consulting. b. Operations analysis. c. Operational efficiency reviews. d. Internal control analysis. e. They are all included in the scope of services.

ANSWER: e POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 116. Which of the following statements is true of external auditing? a. Major focus areas are processes, including risks, controls, and effectiveness and efficiency of processes. b. External auditors perform both assurance and consulting services for public companies. c. Primary scope of services performed includes audits of financial statements. d. The primary client for a public company is upper management.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 117. Which of the following statements is true of internal auditing? a. The primary client is the investor in the company. b. The primary nature of services include assurance and consulting. c. The parties receiving assurance are regulatory agencies and stockholders. d. Internal auditing must be responsible for gathering evidence in all audits, including external audits.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Internal Audit Function

118. Which of the following is the IIA’s stated position regarding the internal auditing activity? a. All responsibilities for internal auditing activity can be outsourced. b. An in-house liaison, such as an executive or senior management member, should be assigned the responsibility for internally managing the internal auditing activity. c. All internal auditors involved in the internal auditing activity must be CIAs. d. Internal auditors for the internal auditing activity should be supervised by CPAs. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 119. Which of the following factors is not considered in assessing the quality of the internal audit? a. Quality of working-paper documentation, reports, and recommendations. b. Review of quality of audit policies, programs, and procedures. c. Attestation services as demanded by market place. d. Educational level and professional experience.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 120. The partial or complete outsourcing of internal audit activities is most likely made to public accounting firms or to other specialized firms who perform which of the following? a. Primarily risk, control, and audit activities. b. Attestation services as demanded by market place. c. Operations analysis and risk analysis. d. Analytical and substantial procedures.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 121. A best practice is to have an oversight of the internal audit function as a responsibility of which of the Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments following? a. Management. b. Internal auditors. c. Audit committee. d. External auditors.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 122. Which of the following is the international body that sets standards for the practice of internal auditing across the world? a. The Internal Audit Reporting Standards Board. b. The Institute of Internal Auditors. c. The International Accounting Standards Board. d. The Charter of Certified Internal Auditors.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 123. Assume that the external auditor decides that because of work performed by internal auditors, the audit risk has been reduced to an acceptable level. As a result of this assessment, the auditor can do which of the following? a. The auditor must test the assertions directly and document a separate conclusion. b. The auditor can decide that direct testing is not necessary. c. The auditor must delegate the responsibility of expressing an opinion to the internal auditors. d. The auditor can assume that inherent risk is zero.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 124. In making judgments about the effect of the internal auditors’ work on the external auditor’s procedures in specific audit areas, which of the following is not one of the issues related to the specific audit areas that is considered by the external auditor?

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments a. Materiality of the financial statement amounts. b. Risk of material misstatement of the assertions related to these financial statement amounts. c. Degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. d. All of the above are considered by the auditor.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 125. Purpose of Materiality Judgments and Common Benchmarks What are the key perspectives and concerns that auditors should be aware of when making materiality judgments? Explain the purpose of materiality judgments and common benchmarks.

The key perspectives and concerns in materiality judgments are: ANSWER:

Auditors should pay attention to investor comment letters sent to the FASB, SEC, PCAOB, or other regulators to better understand materiality issues from an investor viewpoint.

Investors are interested in long-term developing issues, not just short-term trends.

Audit firms realize that materiality judgments are difficult to make. As such, they spend a great deal of time training staff on how to make these judgments appropriately. Further, they have policies and computer decision aids that assist auditors in making the judgments correctly.

Auditors may overrely on quantitative measures of materiality because such measures do not require much thinking. The SEC has been very critical of auditors’ exclusive use of quantitative measures and encourages auditors to document their thought process regarding materiality choices.

The purpose of materiality judgments and common benchmarks: Purposes Posting materiality is a data accumulation and judgment aid that assists the auditor in aggregating information about the potential materiality of misstatements.

Materiality is used to help the auditor plan the audit. If planning materiality is set too high, the auditor may not perform sufficient procedures to detect material misstatements in the financial statements. If planning materiality is set too low, more substantive procedures may be performed than necessary.

Benchmarks If a client has significant and nonrecurring charges to nonoperating expenses, then income from continuing operations may be a more appropriate materiality benchmark than net income.

For companies with a net loss, auditors sometimes use net loss as the benchmark. If a company’s net income varies significantly from year to year, the auditor might consider using an average of net income from the prior three to five years as the materiality benchmark.

For nonprofit entities, appropriate benchmarks would include total expenses, total revenues, or total assets.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments TOPICS:

Materiality judgments

126. Considering Qualitative Factors What are the considerations that may cause a quantitatively small misstatement to be considered material?

ANSWER: Some of the considerations that may cause a quantitatively small misstatement to be considered material include whether the potential misstatement: 1. Arises from an item capable of precise measurement or whether it arises from an estimate and if so, the degree of imprecision inherent in the estimate.

2. Masks a change in earnings or other trends.

3. Hides a failure to meet analysts’ consensus expectations for the enterprise.

4. Changes a loss into income or vice versa.

5. Is in a segment that has been identified as having a significant effect on the company’s stock valuation.

6. Affects compliance with regulatory requirements.

7. Affects loan covenants or other contractual requirements.

8. Has the effect of increasing management’s compensation—for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation.

9. Involves concealment of an unlawful transaction.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-02 - LO: 16-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Materiality judgments 127. Assessing Whether Misstatements Are Material What additional information might the auditor choose to analyze to determine whether or not the financial statements are misstated by a material amount?

ANSWER: During the course of the audit, most of the time there will be multiple misstatements detected. Once misstatements are detected, the auditor should evaluate each misstatement individually, and the auditor should consider the aggregate effect of all misstatements.

Further, if an individual misstatement causes the financial statement as a whole to be materially misstated, that effect cannot be eliminated by other misstatements that have a different directional effect on the financial statements.

For example, if a company’s revenues are materially overstated, the auditor is not allowed to conclude that the effect is immaterial, even if there is an equal and off setting overstatement of expenses. Rather, the auditor would conclude in this case that the financial statements taken as a whole are materially misstated. The rationale is that the trend in revenue growth may be just as important to a user as the effect on net income.

The auditor should inform the audit committee about adjustments arising from the audit that were considered to be material. In addition, the auditor should also provide a list of uncorrected misstatements that were deemed not to be material.

Most auditors request the client to book all known misstatements (unless recording cost is very high) so there are not carryovers from year to year. If the client does not want to book the misstatement, the auditor should assume that the client Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments considers the amount to be material.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-03 - LO: 16-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Misstatements 128. Auditing Merger and Acquisition Transactions How does a company measure the cost of an acquisition of another company? What factors often complicate the determination of actual cost? Explain how each factor complicates the calculation of cost and the steps the auditor has to take to reach a conclusion about the cost of the acquisition.

ANSWER: Costs associated with a merger and the valuation issues are as follows: • Assets – valued at current market value. This is usually determined by an appraisal for fixed assets. Current assets are usually determined through normal audit-type procedures, e.g. estimating current market value of inventory, collectability of receivables, etc.

• Current liabilities – valued at market value. Typical audit procedures can be used to identify amounts eventually paid, or to discover unrecorded assets. The acquiring company can use these same procedures.

• Long-term liabilities – should be adjusted for changes in interest rate and credit rating of the company. Usually a ready market value is available.

• Other liabilities (subjective) – The auditor must be aware of significant changes that might be made to pension plans or other benefit plans. If there are changes, the auditor should engage an actuary to assist in making the judgment.

• Restructuring reserves – this has been a difficult area and one that has been subject to a great deal of manipulation by CFO’s. Often, companies have overestimated the reserves for restructuring with intent to subsequently take the items into income. Newer accounting rules make it more difficult to manipulate these accounts.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-05 - LO: 16-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Audit Considerations for Merger and Acquisition Activities 129. Audit Program for Goodwill Impairment Testing Outline the major elements of an audit program to determine whether there is a goodwill impairment, and if there is, the extent of the goodwill impairment.

An overview of the audit program for goodwill impairment testing: ANSWER:

1. Review the methodology that the client initially used in determining the amount it used to purchase the reporting unit. Examine the initial client documents to determine: a. Assumptions about economic growth and synergies expected with the acquisition. b. Expected cash flow, discounted to present terms. c. Cost savings expected from integrated operations.

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments d. Assumptions about the general economy, industry growth, and new-product innovation.

2. Compare actual results with those expected since the time of the acquisition. a. Determine significant changes in assumptions and projected results. b. Estimate the company’s acquisition model with new assumptions that reflect current market conditions, actual results, and current information about cost of capital to get an estimate of reporting unit fair value. c. Compare fair value with carrying value and determine amount of goodwill impairment.

3. If the client does not have the original data, perform an independent analysis of the industry and develop: a. A set of assumptions about future performance based on industry expectations and company products. b. An estimated of future discounted cash flows. c. A sensitivity analysis of changes in value based on industry and cash-flow assumptions. d. A range of estimates and compare to carrying value of the reporting unit and goodwill carrying cost.

4. If the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company: a. Compare book value with market value. A market value less than book value is presumptive evidence that goodwill has been impaired. b. Determine whether all other assets have been adjusted to fair value, where applicable. c. Compute difference between market value and book value to determine the amount of goodwill impairment. d. Review assumptions about future operations, industry position, expected future cash flows, and strategic plans for the business to determine if the write-off in part (c) is sufficient.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-06 - LO: 16-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Audit Considerations for Fair Value and Impairment 130. Critical Criteria in Assessing Identified Internal Control Deficiencies What general factors should be considered by an auditor in evaluating whether or not a control deficiency is a material weakness, or a significant deficiency, or a control issue of lesser severity?

The following general factors should be considered as the auditor evaluates whether or not ANSWER: a control deficiency is a material weakness, a significant deficiency, or simply a control issue of lesser severity: Assessing Likelihood of Misstatement When the auditor is evaluating a control deficiency, the auditor assesses both the likelihood (whether there is a reasonable possibility) of misstatement and the magnitude of potential misstatement.

AS 5 notes that various risk factors affect the likelihood that a deficiency, or a combination of deficiencies, will result in a misstatement.

These factors include: •The nature of the financial statement accounts, disclosures, and assertions involved •The susceptibility of the related asset or liability to loss or fraud •The subjectivity, complexity, or extent of judgment required to determine the amount involved •The interaction or relationship of the control with other controls, including whether they are interdependent or redundant •The interaction of the deficiencies •The possible future consequences of the deficiency Assessing the Magnitude of a Misstatement

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments AS 5 also identifies factors affecting the magnitude of the misstatement that might result from a deficiency, including: •The financial statement amounts or total of transactions exposed to the deficiency •The volume of activity in the account balance or class of transactions exposed to the deficiency that has occurred in the current period or that is expected in future periods.

Other Factors Other factors to consider when assessing a control deficiency include: 1. Control Environment. Weaknesses in specific components of the control environment have pervasive effects on the financial reporting process. More particularly, deficiencies in the competence of accounting personnel who deal with material account balances are normally considered a material weakness.

2. Repeatability of a Process. If a deficiency is repeatable, such as in a computerized process, the more likely it is to be material.

3. Volume of Transactions Affected. The auditor needs to assess the percentage of control failures multiplied by the average size of a transaction to determine if the amounts that could be misstated are material.

4. Complexity and Subjectivity of the Account Balance. The more complex and subjective a material account balance is, the more likely that a deficiency will be material.

5. Effectiveness of Oversight and Governance. One of the key elements of good internal control is that there should be strong oversight coming from the board of directors, and especially the audit committee. A lack of sufficient oversight would be considered a material weakness regardless of whether misstatements are actually detected in the financial statements.

6. Existence of Compensating Controls. Often there are other controls in place that might compensate for a deficiency in a particular control and that make the original weakness less likely to be judged material.

7. Remediation of a Control Deficiency. The auditor’s report addresses whether there are material weaknesses in the internal control as of the company’s year end. It is possible that a control deficiency may have been identified and remediated by the company prior to the company’s year end. Thus, a deficiency that may have been considered a material weakness at an interim date would no longer be considered a material weakness at year end.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-08 - LO: 16-08 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Assessing Deficiencies in Internal Control 131. Effect of Internal Audit’s Work on the External Audit Provide examples of audit judgments made by the external auditor which would not typically be delegated to the internal auditor.

ANSWER: Because the auditor has the ultimate responsibility to express an opinion on the financial statements, many of the audit judgments must be made by the external auditor and should not be delegated to the internal auditors.

Some of these judgments include assessments of: • Inherent and control risks • The materiality of misstatements • The sufficiency of tests performed • The evaluation of significant accounting estimates.

POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Internal Audit Function 132. Evaluating the Quality of Client’s Internal Audit Function An external auditor assesses the quality of the internal audit function to determine whether the internal auditors’ work is relevant to the external audit and of sufficient quantity and quality. Describe the three factors of the internal audit function that would be considered by the external auditor in this quality assessment.

ANSWER: The external auditor considers three primary characteristics in assessing the quality of the internal audit function: 1. Competence, 2. Objectivity, and 3. Quality of work performance.

Competence: • Educational level and professional experience.

• Professional certification and continuing education.

• Review of quality of audit policies, programs, and procedures.

• Demonstrated supervision and review of internal auditors’ activities.

• Quality of working-paper documentation, reports, and recommendations.

• Periodic evaluation of internal auditors’ performance—both self-assessment and feedback from client management and audit committee.

• Periodic quality-control assessments performed in accordance with the International Standards for the Professional Practice of Internal Auditing.

Assessment of objectivity: • An organizational reporting status is sufficient to assure audit coverage of major organizational risks as well as consideration of, and action on, the findings and recommendations of the internal auditors.

• Internal auditor has direct access and reports regularly to the board of directors, the audit committee, or the owner-manager.

• Board of directors, the audit committee, or the owner-manager oversees employment decisions related to the director of the internal audit function.

• Policies that prohibit internal auditors from auditing areas where relatives are employed in important or audit-sensitive positions.

• Policies that minimize other potential conflicts of interest, such as auditing an area where they were employed before entering internal audit, or where they will be placed after spending time in internal audit.

Assessing the quality of internal audit work: • Scope of work is appropriate to meet the objectives.

• Audit programs are adequate.

• Working papers adequately document work performed, including evidence of supervision and review.

• Conclusions are appropriate in the circumstances.

• Reports are consistent with the results of the work performed.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.16-09 - LO: 16-09 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication Cengage Learning Testing, Powered by Cognero

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Chapter 16 - Advanced Topics Concerning Complex Auditing Judgments STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Internal Audit Function

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Chapter 17 - Other Services Provided by Audit Firms 1. The International Auditing and Assurance Standards Board’s term assurance engagement means the same as The American Institute of Certified Public Accountants’ term attestation engagement. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 2. The subject matter of an attestation engagement has to be as of a point in time. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 3. The IAASB and the AICPA identify three levels of assurance that can be provided in an attestation engagement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 4. In limited assurance engagements, practitioners perform limited procedures (usually analysis of an issue but without significant testing) and checks to see if anything comes to their attention indicating a problem. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 5. An example of the subject matter of a non-audit attestation engagement is management’s assertions about historical financial information and associated disclosures. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 6. The subject matter of a non-audit attestation engagement can be quite varied. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 7. Review reports issued by auditors give positive assurance as to the fair presentation of financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 8. Negative assurance infers that nothing has come to the reviewer's attention that requires change. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 9. Review engagements provide limited assurance on financial statements and are less in scope than audits. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 10. An auditor does not express an opinion on the fairness of the financial statements when issuing a standard compilation report. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 11. One procedure that is common to an audit engagement, as well as to both the compilation and review engagement, is obtaining an engagement letter. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 12. 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. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 13. The performance of inquiry and analytical review procedures to provide a reasonable basis for expressing limited assurance is required for a review service. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 14. A compilation performed in accordance with AICPA standards may be performed by CPAs or accountants who are not certified or licensed. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 15. It is common for an auditor to issue a compilation report on financial statements that omit all of the disclosures required by GAAP. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 16. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued, but does not require that the auditor’s review report be included with the quarterly information, although many companies do include the auditor’s report. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 17. The auditor should perform review procedures (a) on the quarterly information contained in the annual report to shareholders and (b) when engaged to review the quarterly information issued at the end of each of the first three quarters of the fiscal year. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 18. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 19. Regarding interim financial statement reviews, the standards do not require auditors to understand the client’s accounting and financial reporting practices and its related internal controls over the preparation of annual and quarterly reports, since they are not expressing an opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 20. The standard report on a review of separately issued interim financial statements of public companies identifies the information reviewed, indicates that the standards of the PCAOB were followed in performing the review, explains the nature of a review, disclaims an opinion, and provides negative assurance that the auditor is not aware of any material departures from GAAP. Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 21. The SEC requires public filers to have quarterly financial information reviewed by independent auditors. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 22. A review report issued by a public accounting firm on a public client's interim financial statements includes reference to adherence to the standards of the Public Company Accounting Oversight Board. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 23. Accruals, such as estimates of bad debt and income tax expenses, are not usually as precise on interim financial reports as they are on year-end financial reports. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 24. A special purpose framework can use a cash basis financial reporting framework.

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Chapter 17 - Other Services Provided by Audit Firms a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 25. Reporting on a specified account is a form of special report that an auditor may issue in relation to a specific basis of accounting. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 26. Special reports would include compliance with contractual agreements. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 27. When forming an opinion on special purpose financial statements, the auditor should evaluate whether the financial statements include a summary of significant accounting policies. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 28. An other-matter paragraph restricting the use of the auditor’s report is a reporting requirement for a cash Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms basis special purpose financial statement. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 29. When auditing only a single financial statement or a specific element, account, or item of a financial statement, the auditor will have a better understanding of the entity than if the auditor audited the entity’s complete set of financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 30. When a public accounting firm issues a report on financial statements that are issued on an other comprehensive basis of accounting, this special report includes an opinion paragraph identical to an adverse opinion. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 31. A report on compliance with a contractual agreement typically involves the use of negative assurance by the auditor in a separate report. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information

32. 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 the Statutory Accounting Principles are not a recognized alternative comprehensive basis. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 33. A company issuing prospective financial statements can receive a compilation on the statements but not an examination. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 34. A report on agreed-upon procedures issued by accountants provides a form of attestation assurance. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 35. 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 a financial forecast.

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Chapter 17 - Other Services Provided by Audit Firms a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 36. 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. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 37. In agreed-upon procedure engagements, the practitioner does not perform a review, and does not provide an opinion or negative assurance. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 38. One aspect of forensic accounting focuses on identifying the person who has perpetrated the fraud and having that person confess to the fraud. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms TOPICS:

Forensic Accounting

39. Forensic accountants need to have excellent interviewing and people skills. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Forensic Accounting 40. The focus of forensic accounting is similar to financial statement auditing in that it is directed to the fairness of financial statements. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Forensic Accounting 41. Many corporate websites now include sustainability reports, and the placement on those websites is usually quite prominent. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Sustainability Reporting and Assurance 42. Currently, there are various frameworks and standards to assist companies in producing relevant and reliable sustainability data for external users. a. True b. False ANSWER: True POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Sustainability Reporting and Assurance Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 43. Some companies choose to provide no objective assurance regarding their sustainability reports. a. True b. False ANSWER: False POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic TOPICS: Sustainability Reporting and Assurance 44. Which of the following is not subject matter that would be attested to in a non-audit attestation engagement? a. Historical events such as the price of a market basket of goods on a certain date. b. Corporate governance, compliance with law and regulations, or human resource practices. c. Management’s assertions about historical financial information and associated disclosures. d. Prospective financial information, performance measurements, or backlog data.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 45. Which of the following is not a critical component of attestation services? a. Information or process (the subject matter) on which the assurance service is provided. b. Criteria for evaluation, such as compliance with regulations. c. Sufficient appropriate evidence. d. Two parties involved, the practitioner (or the CPA) and the intended users of the report.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 46. What are the two levels of assurance that can be provided in an attestation engagement? a. Risk assurance and reduction assurance. b. Professional assurance and compliance assurance. c. Sufficient assurance and appropriate assurance. d. Reasonable assurance and limited assurance.

ANSWER: d POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 47. What are the two topics that attestation standards provide guidance on? a. They provide a plan for the engagement and criteria about who can participate in the engagement. b. They provide guidance about gathering evidence regarding specific assertions and communicate an opinion on the fairness of the presentation to a third party. c. They provide sufficient assurance on subject matter and appropriate assurance about reporting. d. They provide guidance on reviewing evidence and compiling evidence.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 48. Which of the following is not an AICPA standard of reporting for attestation engagements? a. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement in the report. b. The practitioner must state the practitioner’s conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated in the report. c. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusions that is expressed in the report. d. The practitioner must state all of the practitioner’s significant reservations about the engagement, the subject matter, and if applicable, the assertion related thereto in the report.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 49. Which of the following is not an AICPA general standard for attestation engagements? a. The practitioner must have adequate technical training and proficiency to perform the attestation engagement. b. The practitioner must have reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users. c. The practitioner must adequately plan the work and must properly supervise any assistants. d. The practitioner must exercise due professional care in the planning and performance of the engagement and the preparation of the report.

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Chapter 17 - Other Services Provided by Audit Firms ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 50. Which one of the following statements is false regarding a review? a. A review involves assessing fraud risk. b. A review does not involve obtaining an understanding of the entity’s internal control. c. A review does not involve testing accounting records by obtaining sufficient appropriate evidence through inspection, observation, confirmation, or examining source documents. d. A review does not involve a practitioner obtaining assurance that he or she will become aware of all significant matters that would be investigated in an audit.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 51. Which of the following standards 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.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 52. What types of companies can have a compilation performed in accordance with the AICPA standards? a. Public Companies: Yes; Nonpublic Companies: Yes b. Public Companies: No; Nonpublic Companies: No c. Public Companies: No; Nonpublic Companies: Yes d. Public Companies: Yes; Nonpublic Companies: No ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 53. When an accountant is asked to compile financial statements that omit substantially all of the required disclosures, which of the following actions is appropriate? a. The CPA cannot accept the engagement. b. The CPA may accept the engagement. c. The CPA may accept the engagement if the CPA believes the omission is not undertaken to mislead users. d. The CPA must express an adverse opinion.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 54. When the CPA is not independent with respect to a compilation client, what should the CPA do? a. The CPA must not accept the engagement. b. The CPA must include a separate paragraph in the report stating the lack of independence. c. The CPA must change the engagement to a review engagement. d. The CPA must issue a disclaimer.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 55. What does the review service provided by the CPA firm require? a. It requires the CPA to make inquiries concerning matters affecting the financial statements. b. It requires the CPA to confirm accounts receivable. c. It requires the CPA to test internal controls. d. It requires the CPA to provide reasonable assurance.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 56. For which of the following services must a CPA be independent? a. Audits: Yes; Reviews: Yes; Compilations: Yes b. Audits: Yes; Reviews: Yes; Compilations: No c. Audits: Yes; Reviews: No; Compilations: No d. Audits: Yes; Reviews: No; Compilations: Yes ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 57. Which of the following is an accounting service that involves performing inquiry and analytical procedures as a reasonable basis for expressing limited assurance that no material modifications need to be made to the financial statements in order for the financial statements to conform to GAAP? a. A compilation. b. An audit. c. A review. d. An agreed upon procedure.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 58. 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.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 59. A compilation report provides the user with which one of the following types of assurance? a. No assurance. b. Absolute assurance. c. Limited assurance.

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Chapter 17 - Other Services Provided by Audit Firms d. Negative assurance.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 60. Which of the following engagements requires less evidence than a review of financial statements? a. A compilation. b. An audit. c. An examination. d. Attestation.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 61. Which of the following services provides limited assurance? a. Review. b. Audit. c. Examination. d. Compilation.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 62. Which one of the following procedures is not a standard procedure when performing a review? a. Assess the internal control over financial reporting. b. Read the financial statements to determine whether they appear to conform to GAAP. c. Obtain or prepare a trial balance of the general ledger and foot and reconcile it to the general ledger. d. Trace the financial statement amounts to the trial balance.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Review and Compilation Engagements

63. How many paragraphs does the standard review report for U.S. nonpublic companies or development stage companies have? a. One. b. Two. c. Three. d. Four.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 64. Which of the following engagements is sometimes referred to as bookkeeping services? a. Reviews. b. Special reports. c. Compilations. d. Audits.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 65. Which of the following statements is false regarding compilation procedures? a. The practitioner should have a general knowledge of the organization’s industry, the nature of its accounting records, the accounting basis to be used (GAAP or a special purpose framework other than GAAP), and the form and content of the financial statements. b. The practitioner is required to make inquiries or perform procedures to verify, corroborate, or review information provided by the client. c. The practitioner is not required to obtain an understanding of internal control over financial reporting. d. The practitioner should read the financial statements, including footnotes, to make sure that they are appropriate in form and free from obvious material misstatement.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Review and Compilation Engagements

66. Which of the following situations is not one where the practitioner will modify the standard compilation report? a. There is an omission of disclosures for the compilation. b. A compilation report is not required c. The practitioner lacks independence. d. An understanding of internal controls cannot be obtained.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 67. What are the performance standards required for interim review engagements on the quarterly financial information of public companies? a. Statements on Standards for Accounting and Review Services. b. Standards of the Public Company Accounting Oversight Board. c. Statements on Reviews for Public Registrants and Securities Acts. d. Standards set by the Public Oversight Board of the Enforcement Division of the SEC. ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 68. When are publicly owned companies required to file a Form 10Q with the SEC? a. Within 10 to 15 days (depending on the company size) after the end of each of the first three quarters of the fiscal year b. Within 30 to 45 days (depending on the company size) after the end of each of the first three quarters of the fiscal year c. Within 40 to 45 days (depending on the company size) after the end of each of the first three quarters of the fiscal year d. Within 45 to 60 days (depending on the company size) after the end of each of the first three quarters of the fiscal year ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Providing Assurance on Interim Financial Information

69. Which of the following procedures is not a review procedure for interim financial information? a. Making inquiries. b. Performing analytical procedures. c. Reading the minutes of the board of directors’ meetings d. Obtaining oral assurance from management that there are no subsequent events.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 70. Which of the following items is not contained in the standard report on a review of separately issued interim financial statements of public companies? a. A description of the information reviewed. b. A statement indicating that the standards of the PCAOB were followed in performing the review. c. A description of the nature of the review. d. Positive assurance that the auditor is not aware of any material departures from GAAP. ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information 71. Which of the following is not a way that the disclosure and reporting requirements for interim financial statements differ from those for annual financial statements? a. Accruals for estimates of bad debt are not usually as precise on interim dates as they are at year end. b. Information disclosed in the latest annual statements does not have to be repeated in the interim statements except for continuing contingencies and other uncertainties. c. Accruals for estimates of income tax expenses are not usually as precise on interim dates as they are at year end. d. The interim information does not have to be filed with the SEC for public companies.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Providing Assurance on Interim Financial Information Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 72. Craig Marks, CPA performs an audit of Treasure, Inc., which keeps its financial statements on the tax basis of accounting. Craig is aware of this fact and audits the financial statements on the criteria of the tax basis.

What type of engagement is this? a. This engagement is not permitted by the AICPA. b. This engagement is an audit that will result in the issuance of a special report. c. This engagement is a compilation. d. This engagement is only performed by tax accountants who do not provide attest services.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 73. Which one of the following reports 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.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 74. Other comprehensive bases of accounting do not include which of the following? a. Cash basis. b. Tax basis. c. Regulatory basis. d. Intended basis.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 75. When forming an opinion on special purpose financial statements, which of the following items does the auditor not need to evaluate? a. Whether the financial statements adequately describe the applicable financial reporting framework.

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Chapter 17 - Other Services Provided by Audit Firms b. Whether the financial statements have the appropriate title. c. Whether the financial statements include a summary of significant accounting policies. d. Whether the financial statements differ in GAAS presentation.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 76. For which of the following special purpose financial statements is a dual opinion on a special purpose framework and GAAP required? a. Cash basis. b. Tax basis. c. Regulatory basis for general use. d. Contractual basis.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 77. For which of the following special purpose financial statements is an emphasis-of-matter paragraph alerting readers about the preparation in accordance with the special purpose framework not required? a. Cash basis. b. Tax basis. c. Regulatory basis for general use. d. Contractual basis.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 78. For which of the following special purpose financial statements is a description of purpose for which special purpose financial statements are prepared not required? a. Cash basis. b. Regulatory basis for use by management and the regulator only. c. Regulatory basis for general use. d. Contractual basis.

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Chapter 17 - Other Services Provided by Audit Firms ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 79. For which of the following special purpose financial statements is an other-matter paragraph restricting the use of the auditor’s report required? a. Cash basis. b. Tax basis. c. Regulatory basis for general use. d. Contractual basis.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 80. In which of the following cases should the auditor’s report on compliance not include a statement that nothing came to the auditor’s attention that caused the auditor to believe that the entity failed to comply with specified aspects of the contractual agreements or regulatory requirements? a. When the auditor has not identified any instances of noncompliance. b. When the auditor has expressed an unmodified or qualified opinion on the financial statements to which the applicable covenants of such contractual agreements or regulatory requirements relate. c. When the applicable covenants or regulatory requirements relate to accounting matters that have been subjected to the audit procedures applied in the audit of financial statements. d. When the auditor needs to obtain further evidence to corroborate audit evidence acquired from management and the accounting records.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 81. Which of the following statements is false regarding agreed-upon procedures engagements? a. In this type of engagement, the independent practitioner is engaged to assist in evaluating subject matter or an assertion. b. In this type of engagement, the nature, timing, and extent of agreed-upon procedures is the same for all engagements.

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Chapter 17 - Other Services Provided by Audit Firms c. In this type of engagement, the practitioner does not perform a review, and does not provide an opinion or negative assurance. d. In this type of engagement, the report should indicate that it is restricted in its use to specified parties.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 82. Which of the following statements is false regarding responsibilities associated with agreed-upon procedures engagements? a. The responsibility of the practitioner is to conduct the procedures and report the findings in accordance with applicable professional standards. b. The practitioner must have adequate knowledge of the subject matter. c. The practitioner is required to determine if there exists a difference between the agreed-upon procedures requested by the specified parties and the procedures that the practitioner would have decided to conduct if the practitioner would have been engaged to perform another form of engagement. d. The practitioner should not agree to perform agreed-upon procedures that are overly subjective.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 83. Which of the following procedures is an appropriate agreed-upon procedure? a. Evaluating the competency or objectivity of another party. b. Performing of mathematical computations. c. Obtaining an understanding about a particular subject. d. Reading the work performed by others solely to describe their findings.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 84. Which of the following procedures is an inappropriate agreed-upon procedure?

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Chapter 17 - Other Services Provided by Audit Firms a. Comparison of documents, schedules, or analyses. b. Performance of mathematical computations. c. Confirmation of specific information with third parties. d. Evaluation of the competency or objectivity of another party.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 85. Which of the following activity is not part of the compilation of prospective financial statements? a. Assembling prospective financial statements based on the responsible party’s assumptions. b. Performing compilation procedures, including reading the prospective financial statements, along with their assumptions and accounting policies, and considering whether they appear to be presented in conformity with AICPA presentation guidelines and that they are not obviously inappropriate. c. Issuing a compilation report. d. Providing assurance on the prospective financial statements.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 86. Which of the following activities is not part of the examination of prospective financial statements? a. Evaluating the support underlying the assumptions. b. Evaluating the preparation of the prospective financial statements. c. Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines. d. Assembling the prospective financial statements.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 87. Pro forma financial information is often used to illustrate the effects of various types of transactions. Pro Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms forma financial information would be least likely to be used with which of the following transactions? a. Setting up a bond sinking fund. b. Disposing of a significant segment of a business. c. Proposing the sale of securities and applying the proceeds to a project. d. Business combinations.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 88. Which of the following guidelines is not a presentation that pro forma financial information should adhere to? a. It should describe the transaction or event that is reflected in the pro forma financial information. b. It should describe significant assumptions used to develop the pro format adjustments. c. It should make clear that the pro forma financial information is indicative of results that would have been achieved had the transaction or event actually taken place at an earlier time. d. It should describe any significant uncertainties about those assumptions.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 89. Which of the following procedures is not appropriate for examining or reviewing pro forma financial information? a. Obtaining less evidence in an examination engagement than in a review engagement. b. Obtaining an understanding of the underlying transaction or event. c. Discussing management’s assumptions regarding the effects of the transaction or event. d. Evaluating whether pro forma adjustments are completely recorded.

ANSWER: a POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms 90. Which of the following statements best describes 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 detecting fraud, while forensic accounting provides an audit specific to material fraud discovery. c. An audit must follow Generally Accepted Auditing Standards, while the forensic accountant is bound to Generally Accepted Fraud Standards. d. An audit utilizes sampling techniques to detect material misstatements, while forensic accounting examines the entire population of fraudulent transactions.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Forensic Accounting 91. Which of the following statements is false regarding forensic accounting? a. Forensic accounting builds support for legal action against the person committing the fraud by identifying the fraud, calculating the damages caused by the fraud, and building both factual and testimonial evidence of the fraud. b. Forensic accountants rely on sampling of fraud-related documents to accurately measure the cost of the fraud. c. One aspect of forensic accounting focuses on identifying the person who has perpetrated the fraud and having that person confess to the fraud. d. Interviewing is one of the most important forensic accounting skills.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Forensic Accounting 92. Which of the following situations is least likely to initiate a forensic accounting engagement? a. Where management suspects a fraud is occurring within the organization. b. Where strong internal controls exist. c. Where an auditor recommends a separate forensic engagement due to hints of fraud uncovered during an audit. d. Where auditors deem there are situations of heightened fraud risk.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms STATE STANDARDS: TOPICS:

United States - AK - AICPA BB-Critical thinking Forensic Accounting

93. Which of the following descriptions is not a key priority to support the work of professional accountants in embedding sustainable practices? a. Raising awareness and facilitating sharing and collaboration across the global accountancy community. b. Incorporating accounting for sustainability within professional training and education. c. Using traditional ways of thinking about organizational performance. d. Establishing an international integrated reporting committee to develop a new reporting model that will better reflect the interconnected impact of financial, environmental, social, and governance factors on the long-term performance and condition of an organization.

ANSWER: c POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Sustainability Reporting and Assurance 94. Which of the following descriptions best explains triple bottom line reporting? a. It is reporting on assets, liabilities, and stockholders’ equity. b. It is reporting on financial, environmental and social performance. c. It is reporting on auditing, accounting, and ethics. d. It is reporting with respect to laws, norms, and performance standards.

ANSWER: b POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Sustainability Reporting and Assurance 95. Which of the following statements is false regarding reporting on sustainability activities and outcomes? a. Investor interest, socially responsible investment funds, and the Dow Jones Sustainability Index have increased demand for these sustainability disclosures. b. Specific sustainability disclosures that companies make vary little from company to company. c. Many corporate websites now include sustainability reports, and the placement on those websites is usually quite prominent. d. Regarding sustainability, companies determine what to report and how to report it by using various available guidelines, the most prominent of which is the Global Reporting Initiative (GRI) G3 Reporting Framework.

ANSWER: b POINTS: 1 Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Sustainability Reporting and Assurance 96. Which of the following is not considered a part of external assurance over sustainability reporting, as stated by the Global Reporting Initiative (GRI) Reporting Framework? a. External assurance engagements should be conducted by those with competence in the subject matter and assurance practices b. External assurance engagements should assess whether the sustainability report is reasonable, balanced, and appropriately inclusive. c. External assurance engagements should assess the extent to which the report preparer has applied the GRI Reporting Framework in reaching its conclusions. d. External assurance engagements can be issued by the CFO of the company issuing the sustainability report.

ANSWER: d POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Sustainability Reporting and Assurance 97. Types of Assurance Engagements What is the difference between reasonable assurance engagements and limited assurance engagements?

ANSWER: According to the IAASB, reasonable assurance engagements are those whose objective “is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion” (International Standards on Assurance Engagements, ISAE, paragraph 11). According to the IAASB, limited assurance engagements are those whose objective “is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion” (ISAE paragraph 11).

In limited assurance engagements, the practitioner performs limited procedures (usually analysis of an issue but without significant testing) and checks to see if anything comes to their attention indicating a problem.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-01 - LO: 17-01 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Non-Audit Attestation Services Provided by Audit Firms 98. Compilation Reporting Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms For a compilation report, identify: A. for what type of organization the report may be performed; B. the procedures the auditor performs; C. the type of assurance provided; D. the requirements for auditor independence.

ANSWER: For a compilation report: A. The compilation report can be performed only for nonpublic entities.

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 B. statements. The CPA is not required to make inquiries or perform substantive procedures.

C. The compilation report provides no assurance.

The auditor need not be independent to perform a compilation, but if the D. auditor is not independent, then the lack of independence should be disclosed in the report issued by the auditor.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 99. Compilation Reporting A banker friend and you were discussing compiled financial statements. He said,” When CPAs associate their name with compiled financial statements, their only responsibility is to the client and that is limited to the proper summarization and presentation on the financial statement information provided by the client. The opinion clearly states that the auditor has not conducted an audit and does not express an opinion on this fair presentation. Therefore, if users rely on compiled financial statements, they do so at their own peril and can never hold the CPA responsible for inadequate performance. Users should interpret the financial statements as if they had been prepared by management.”

REQUIRED: How would you respond to your friend?

The accountant is responsible for the care in the preparation of compiled financial ANSWER:

statements. As such, the accountant must perform the following steps with due care: < Know something about the accounting principles and practices of the client's industry. < Know the client, the nature of its business transactions, accounting records and employees, and the basis, form, and content of the financial statements. < Make inquiries to determine if the client's information is satisfactory. < Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and generally accepted accounting principles. < Disclose in the report any omissions or departures from generally accepted accounting principles of which the accountant is aware. This requirement does not apply to a compilation that omits substantially all disclosures.

Therefore, the report must also be properly prepared and reflect the findings of the accountant. Users other than management are not prohibited from using compiled financial statements. They can expect the accountant to meet the standards set by the profession.

The courts have not established the responsibilities of accountants for compilations.

Presumably, the responsibilities should be far less than for audits and somewhat less than

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Chapter 17 - Other Services Provided by Audit Firms for reviews. Responsibilities exist, but the level has yet to be finalized in the opinion of the courts.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 100. Review reports For a review report, identify: A. for whom what type of the organization the report may be performed; B. the procedures the auditor performs; C. the type of assurance provided; D. the requirement for auditor independence.

ANSWER: For a review report: A. Review reports may be performed for both public and nonpublic companies.

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 B. 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.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 101. 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 the engagement?

ANSWER: 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.

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Chapter 17 - Other Services Provided by Audit Firms POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-02 - LO: 17-02 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Review and Compilation Engagements 102. Review of Interim Financial Information What are some common procedures that the auditor will complete when performing a review of interim financial information?

ANSWER: Interim financial information is reported in quarterly financial statements. The SEC requires publicly owned companies to (1) file quarterly financial information with the SEC on Form 10-Q within 40 to 45 days (depending on the company size) after the end of each of the first three quarters of the fiscal year and provide their shareholders with quarterly reports and (2) include certain quarterly information in the annual reports to the SEC (Form 10-K) and in the annual reports to shareholders. The SEC requires publicly owned corporations to have their quarterly financial information reviewed by their independent auditors before it is issued, but does not require that the auditor’s review report be included with the quarterly information, although many companies do include the auditor’s report. The term auditor is used in this discussion not because the auditor is performing an audit but because this section concerns the review of interim financial information performed by the auditor of the annual financial statements of the company.

The AICPA’s AU-C Section 930 “Interim Financial Information” and the IAASB’s ISRE (paragraphs 43-63) contain the relevant professional guidance on this topic.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-03 - LO: 17-03 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication 103. Special Reports AU-C Section 805 provides guidance on audits of single financial statements and specific elements, accounts, or items of a financial statement. What are some examples of these types of situations?

ANSWER: The following are examples of single financial statements, each of which would include related notes: • Balance sheet • Statement of income or statement of operations • Statement of retained earnings • Statement of cash flows • Statement of assets and liabilities • Statement of changes in owner’s equity • Statement of revenues and expenses • Statement of operations by product lines The following are examples of specific elements, accounts, or items of a financial statement: Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms • Accounts receivable; allowance for doubtful accounts receivable; inventory; the liability for accrued benefits of a private benefit plan; the recorded value of identified intangible assets; or the liability for incurred but not reported claims in an insurance portfolio, including related notes • A schedule of externally managed assets and income of a private benefit plan, including related notes • A schedule of disbursements regarding a lease property, including related notes • A schedule of profit participation or employee bonuses, including related notes POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-04 - LO: 17-04 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Special Considerations for Reporting 104. Pro Forma Financial Information What is the difference between historical financial information and pro forma financial information? Discuss the guidelines that should be adhered to when presenting pro forma financial information.

ANSWER: Historical financial information describes actual results of financial information. In contrast, pro forma financial information shows “what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date” (AT 401, paragraph .04).

The presentation of pro forma financial information should adhere to the following guidelines: • It should describe the transaction or event that is reflected in the pro forma financial information.

• It should describe the source of historical financial information upon which the pro forma financial information is based.

• It should describe significant assumptions used to develop the pro format adjustments.

• It should describe any significant uncertainties about those assumptions.

• It should indicate that pro format financial information should be considered in conjunction with the historical financial information upon which the pro forma financial information is based.

• It should make clear that the pro forma financial information is not necessarily indicative of results that would have been achieved had the transaction or event actually taken place at an earlier time.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 105. Star Appliance Corp. has requested that Malfie Thomas, CPA provide a report, including a debt compliance letter, to Great Northern Bank about the existence or nonexistence of certain loan conditions. The Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms conditions to be reported on are the working capital ratio, dividends paid on preferred stock, aging of accounts receivable, and the competence of management. This is Malfie’s first experience with Star appliance. Should Malfie accept this engagement? Provide justification for your answer.

ANSWER: It would be appropriate for Malfie to provide a report to Great Northern Bank on all of the conditions except the competency of management. Reports on the working capital ratio, dividends paid on preferred stock, and aging of accounts receivable are factual matters within a normal auditor's competence. Reporting on the competence of management is highly subjective and should not ordinarily be in a debt compliance letter.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-05 - LO: 17-05 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Attestation on Agreed-Upon Procedures , Financial Forecasts and Projections, and Pro Forma Financial Information 106. Forensic accounting Contrast the financial statement auditor's consideration of fraud to that of a forensic accountant.

ANSWER: A financial statement auditor is focused on drawing conclusions relative to the fair presentation of financial statements in accordance with GAAP 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 Cengage Learning Testing, Powered by Cognero

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Chapter 17 - Other Services Provided by Audit Firms accountant.

POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-06 - LO: 17-06 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication STATE STANDARDS: United States - AK - AICPA BB-Critical thinking TOPICS: Forensic Accounting 107. Sustainability Reporting Why is there a demand for independent assurance on sustainability reporting? Describe the features of external assurance over sustainability provided in the Global Reporting Initiative Reporting Framework.

ANSWER: There is a demand for independent assurance on sustainability reporting because such assurance enhances the credibility of the reported information. And this might be information that management would have incentives for misstating.

The Global Reporting Initiative (GRI) Reporting Framework states that external assurance over sustainability reports should: • Be conducted by those with competence in the subject matter and assurance practices • Be performed in a systematic manner that is evidence-based and includes adequate documentation • Assess whether the sustainability report is reasonable, balanced, and appropriately inclusive • Be issued by individuals or organizations that are independent of the company issuing the sustainability report • Assess the extent to which the report preparer has applied the GRI Reporting Framework in reaching its conclusions • Report results in a report that is publicly available, written in form, and that states the relationship between the preparer of the report and the issuer of the report POINTS: 1 LEARNING OBJECTIVES: AUDT.JOHN.16.17-07 - LO: 17-07 NATIONAL STANDARDS: United States - BUSPORG: Analytic United States - BUSPROG: Communication TOPICS: Sustainability Reporting and Assurance

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