CHAPTER 1 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The audit objective that all transactions and accounts that should be presented in the financial statements are in fact included is related to which of the PCAOB assertions? A) Existence. B) Rights and obligations. C) Completeness. D) Valuation.
2) Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of: A) presentation and disclosure. B) completeness. C) rights and obligations. D) existence.
3) During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion of: A) existence or occurrence. B) completeness. C) valuation or allocation. D) presentation and disclosure.
4) The confirmation of an account payable balance selected from the general ledger provides primary evidence regarding which management assertion?
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A) Completeness. B) Valuation. C) Allocation. D) Existence.
5) What type of evidence would provide the highest level of assurance in an attestation engagement? A) Evidence secured solely from within the entity. B) Evidence obtained from independent sources. C) Evidence obtained indirectly. D) Evidence obtained from multiple internal inquiries.
6) Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? A) The entity has rights to the inventory. B) Inventory is properly valued. C) Inventory is properly presented in the financial statements. D) Inventory is complete.
7) An auditor traces the serial numbers on equipment to a nonissuer's sub-ledger. Which of the following management assertions is supported by this test? A) Valuation and allocation. B) Completeness. C) Rights and obligations. D) Presentation and disclosure.
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8) An auditor has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the: A) control environment factors that affect the organizational structure. B) correlation of detection risk and inherent risk. C) effectiveness of the entity's internal control activities. D) possible effects on the entity's financial statements.
9) Which of the following types of audit evidence provides the least assurance of reliability? A) Receivable confirmations received from the client's customers. B) Prenumbered receiving reports completed by the client's employees. C) Prior months' bank statements obtained from the client. D) Municipal property tax bills prepared in the client's name.
10) Which of the following is a management assertion regarding account balances at the period end? A) Transactions and events that have been recorded have occurred and pertain to the entity. B) Transactions and events have been recorded in the proper accounts. C) The entity holds or controls the rights to assets, and liabilities are obligations of the entity. D) Amounts and other data related to the transactions and events have been recorded appropriately.
11) A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?
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A) Statement of Auditing Standards. B) Statements on Standards for Attestation Engagements. C) Statements on Standards for Accounting and Review Services. D) Statements on Standards for Consulting Services.
12) In auditing the long-term debt account, an auditor's procedures most likely would focus primarily on management's assertion of: A) existence. B) completeness. C) allocation. D) rights and obligations.
13) An auditor selected items for test counts from the client's warehouse during the physical inventory observation. The auditor then traced these test counts into the detailed inventory listing that ultimately agreed to the financial statements. This procedure most likely provided evidence concerning management's assertion of: A) completeness. B) valuation. C) presentation and disclosure. D) existence. E) rights and obligations.
14) An auditor selected items from the client's detailed inventory listing (that agreed to the financial statements). During the physical inventory observation, the auditor then found each item selected and counted the number of units on hand. Assuming that the amount on hand was the same as the amount in the client's detailed inventory listing, this procedure most likely would provide evidence concerning management's assertion of:
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A) completeness. B) valuation. C) presentation and disclosure. D) existence. E) rights and obligations.
15) According to PCAOB Auditing Standard No. 2201 ( AS 2201), the auditor should identify significant accounts and disclosures and their relevant assertions. Which of the following financial statement assertions is not explicitly identified in AS 2201? A) Completeness. B) Valuation or allocation. C) Accuracy. D) Existence or occurrence. E) All of these are assertions identified in AS 2201.
16) When testing the completeness assertion for a liability account, an auditor ordinarily works from the: A) financial statements to the potentially unrecorded items. B) potentially unrecorded items to the financial statements. C) accounting records to the supporting evidence. D) trial balance to the subsidiary ledger.
17) If an auditor is performing procedures related to the information that is contained in the client's pension footnote, he/she is most likely to obtain evidence concerning management's assertion about: A) rights and obligations. B) existence. C) valuation. D) presentation and disclosure.
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18) Which of the following questions would be inappropriate for an auditor to ask a client when exhibiting an appropriate level of professional skepticism while completing an audit procedure related to the internal control system? A) What can go wrong in this process? B) Which of your employees is a fraudster? C) What else is important to know about this process? D) What happens when a key employee goes on vacation?
19) To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decision-making process? A) Identify audit evidence relevant to the verification of assertions management makes in its unaudited financial statements and notes. B) Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient, competent evidence about assertions management makes in financial statements and notes. C) Recognize the financial assertions made in management's financial statements and footnotes. D) Evaluate the evidence produced by the performance of procedures and decide whether management's assertions conform to generally accepted accounting principles and reality.
20) Which of the following is an underlying condition that in part creates the demand by users for reliable information? A) Economic transactions that are numerous and complex. B) Decisions that are time-sensitive. C) Users separated from accounting records by distance and time. D) Financial decisions that are important to investors and users. E) All of the these choices are correct.
21) Which of the following is not included in the American Accounting Association (AAA) definition of auditing? Version 1
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A) Potential conflict of interest. B) Systematic process. C) Assertions about economic actions. D) Established criteria.
22) What is the term used to identify the risk that the client's financial statements may be materially false and misleading? A) Business risk. B) Information risk. C) Client risk. D) Risk assessment.
23) Which of the following is not a recommendation usually made following the completion of an operational audit? A) Economic and efficient use of resources. B) Effective achievement of business objectives. C) Attesting to the fairness of the financial statements. D) Compliance with company policies.
24) In order to be considered as external auditors with respect to government agencies, GAO auditors must be: A) organizationally independent. B) empowered as the accounting and auditing agency by the U.S. Congress. C) funded by the federal government. D) guided by standards similar to GAAS.
25)
Which of the following is the essential purpose of the audit function?
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A) Detection of fraud. B) Examination of individual transactions to certify as to their validity. C) Determination of whether the client's financial statement assertions are fairly stated. D) Assurance of the consistent application of correct accounting procedures.
26) The audit objective that all the transactions and accounts presented in the financial statements represent real assets, liabilities, revenues, and expenses is related most closely to which of the PCAOB assertions? A) Existence or occurrence. B) Rights and obligations. C) Completeness. D) Presentation and disclosure.
27) The audit objective that all transactions are recorded in the proper period is related most closely to which of the Audit Standards Board (ASB) transaction assertions? A) Occurrence. B) Completeness. C) Cutoff. D) Accuracy.
28) The audit objective that all transactions are recorded in the proper account is related most closely to which one of the ASB transaction assertions? A) Occurrence. B) Completeness. C) Accuracy. D) Classification.
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29) The audit objective that all balances include items owned by the client is related most closely to which one of the ASB balance assertions? A) Existence. B) Rights and obligations. C) Completeness. D) Valuation.
30) The audit objective that all balances include all items that should be recorded in that account is related most closely to which one of the ASB balance assertions? A) Existence. B) Rights and obligations. C) Completeness. D) Valuation.
31) The audit objective that footnotes in the financial statements should be clear and expressed such that the information is easily conveyed to the readers of the financial statements is related most closely with which of the ASB presentation and disclosure assertions? A) Occurrence. B) Rights and obligations. C) Comprehensibility. D) Understandability.
32) The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. The auditor reviewed all work orders that were capitalized as part of the equipment costs. Which of the following is the ASB transaction assertion most closely related to the auditor's testing?
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A) Occurrence. B) Completeness. C) Accuracy. D) Classification.
33) The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing? A) Existence. B) Completeness. C) Rights and obligations. D) Valuation.
34) Which of the following best describes the primary role and responsibility of independent external auditor? A) Produce a company's annual financial statements and notes. B) Express an opinion on the fairness of a company's annual financial statements and footnotes. C) Provide business consulting advice to audit clients. D) Obtain an understanding of the client's internal control structure and give management a report about control problems and deficiencies.
35) Which of the following best describes the main reason independent auditors report on management's financial statements?
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A) Management fraud may exist and it is likely to be detected by independent auditors. B) The management that prepares the statements and the persons who use the statements may have conflicting interests. C) Misstated account balances may be corrected as the result of the independent audit work. D) The management that prepares the statements may have a poorly designed system of internal control.
36) The auditor's judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of: A) quality control. B) generally accepted auditing standards, which include the concept of materiality. C) the auditor's evaluation of the audited company's internal control. D) the applicable financial reporting framework (i.e., GAAP in the United States).
37)
Assurance services involve all of the following, except: A) relevance as well as the reliability of information. B) nonfinancial information as well as traditional financial statements. C) providing absolute rather than reasonable assurance. D) electronic databases as well as printed reports.
38) Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of: A) objective judgment. B) independent integrity. C) professional skepticism. D) impartial conservatism.
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39)
Which of the following best describes assurance services?
A) Independent professional services that report on the client's financial statements. B) Independent professional services that improve the quality of information for decision makers. C) Independent professional services that report on specific written management assertions. D) Independent professional services that improve the operations of the client.
40) Which of the following is not a PCAOB assertion about inventory related to presentation and disclosure? A) Inventory is properly classified as a current asset on the balance sheet. B) Inventory is properly stated at its cost on the balance sheet. C) Major inventory categories and their valuation bases are adequately disclosed in notes. D) All of these are PCAOB presentation and disclosure assertions about inventory.
41) Which of the following is not an ASB assertion about inventory related to presentation and disclosure? A) Inventory is properly classified as a current asset on the balance sheet. B) Inventory is properly stated at cost on the balance sheet. C) Major inventory categories and their valuation bases are adequately disclosed in notes. D) All of these are ASB presentation and disclosure assertions about inventory.
42)
In performing an attestation engagement, a CPA typically:
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A) supplies litigation support services. B) assesses control risk at a low level. C) expresses a conclusion on an assertion about some type of subject matter. D) provides management consulting advice.
43)
An attestation engagement is one in which a CPA is engaged to:
A) issue, or does issue, a report on subject matter or an assertion about the subject matter that is the responsibility of another party. B) provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed. C) testify as an expert witness in accounting, auditing or tax matters, given certain stipulated facts. D) assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.
44) The underlying conditions that create demand by users for reliable information include all of the following, except: A) transactions are numerous and complex. B) users lack professional skepticism. C) users are separated from accounting records by distance and time. D) financial decisions are important to investors and users. E) decisions are time-sensitive.
45) Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about the PCAOB assertion of: A) presentation. B) completeness. C) rights. D) existence.
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46) Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the PCAOB assertion of: A) completeness. B) existence. C) presentation. D) valuation. E) rights and obligations.
47) Inquiries of warehouse personnel concerning possible obsolete or slow moving inventory items provide assurance about the ASB balance assertion of: A) completeness. B) existence. C) presentation. D) valuation. E) rights and obligations.
48) The probability that the information circulated by a company will be false or misleading is referred to as: A) business risk. B) information risk. C) assurance risk. D) audit risk.
49) The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating:
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A) they have read the financial statements. B) they are not aware of any false or misleading statements (or any key omitted disclosures). C) they believe that the financial statements present an accurate picture of the company's financial condition. D) All of the these choices are correct.
50) The process of a CPA obtaining a certificate and license in a state other than the state in which the CPA's certificate was originally obtained is referred to as: A) substantial equivalency. B) quid pro quo. C) relicensing. D) re-examination.
51)
The risk an entity will fail to meet its objectives is referred to as: A) business risk. B) information risk. C) assurance risk. D) audit risk.
52)
The four basic requirements for becoming a CPA in most states are:
A) education, the CPA Examination, experience, and substantial equivalency. B) the CPA Examination, experience, continuing professional education, and a state certificate. C) continuing professional education, the CPA Examination, experience, and an AICPA certificate. D) education, the CPA Examination, experience, and a state certificate.
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53) The study of business operations for the purpose of making recommendations about the efficient use of resources, effective achievement of business objectives, and compliance with company policies is referred to as A) environmental auditing. B) financial auditing. C) compliance auditing. D) operational auditing.
54) The accounting, auditing, and investigating agency of the U.S. Congress, headed by the U.S. Comptroller General, is known as A) the Federal Bureau of Investigation (FBI). B) the U.S. General Accountability Office (GAO). C) the Internal Revenue Service (IRS). D) the United States Legislative Auditors (USLA).
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 55) What are the differences between the American Accounting Association and AICPA definitions and objectives of auditing?
56)
What is operational auditing and by whom is it performed?
57)
What is information risk? What is business risk?
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58)
What are the four basic requirements for becoming a CPA?
59)
Define assurance, attestation, and auditing in the context of "lending credibility."
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Answer Key Test name: Chap 01_8e_Test Bank 1) C 2) B 3) D 4) D 5) B 6) D 7) B 8) D 9) B 10) C 11) B 12) B 13) A 14) D 15) C 16) B 17) D 18) B 19) C 20) E 21) A 22) B 23) C 24) A 25) C 26) A Version 1
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27) C 28) D 29) B 30) C 31) D 32) D 33) D 34) B 35) B 36) D 37) C 38) C 39) B 40) B 41) D 42) C 43) A 44) B 45) B 46) D 47) D 48) B 49) D 50) A 51) A 52) D 53) D 54) B
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55) The AAA definition is broad and general enough to encompass independent, internal, and governmental auditing. The AICPA has not defined auditing but its statement on objectives of financial audits restricts auditing to independent CPA's audit of the traditional financial statements and their footnotes. The AICPA SAS also offers guides to report on internal control, letters to underwriters, and special reports. 56) Operational auditing is the evaluation of business operations for various purposes. Operational auditing includes: (1) testing for compliance with laws and regulations and company policies and procedures, (2) evaluating the effectiveness of operations in achieving goals and objectives, and (3) evaluating the efficiency and economy of operations. Operational audits are normally performed by internal auditors. However, operational audits also may be conducted by independent CPA firms as part of their management advisory services. 57) Information risk is the risk that financial statements will be materially false or misleading. Business risk is the risk an entity will fail to meet its objectives. 58) Education, the CPA Examination, experience, and a state certificate. 59) Assurance is the "lending of credibility" to information. Attestation is the "lending of credibility" to assertions made by a third party. Auditing is the "lending of credibility" to financial statements.
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CHAPTER 1: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Which of the PCAOB assertions (A-E) are best verified by the following audit procedures (1-4)? A.Existence or occurrence B.Rights and obligations C.Valuation or allocation D.Completeness E.Presentation and disclosure
___ ___ ___ ___
1. Confirming inventory held on consignment by the client with independent third party. 2. Consulting the Wall Street Journal for year-end prices of securities held by the client. 3. Physically examine all major property and equipment additions. 4. Review the aged trial balance for significant past due accounts.
2) ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the revenue of ABC Company. The auditors performed the audit procedures listed 1-3. For each audit procedure select the ASB transaction assertion that is most likely being tested. A.Occurrence B.Completeness C.Cutoff D.Accuracy E.Classification
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___ 1. The auditor reviewed the shipping documents to check the date that product was shipped to XYZ Company. ___ 2. The auditor reviewed the shipping documents to ensure that all product included in the sales revenue to XYZ had been shipped. ___ 3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been properly billed.
3) Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit procedures listed 1-5. For each audit procedure select the ASB balance assertion that is most likely being tested. A.Existence B.Rights and obligations C.Completeness D.Accuracy E.Valuation
___ 1. The auditors walked through the warehouse looking for obsolete inventory. ___ 2. The auditors compared invoices received from suppliers with the cost of inventory listed in the inventory accounts. ___ 3. The auditors reviewed purchase orders to determine if any inventory was on consignment. ___ 4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs had been included in inventory costs. ___ 5. The auditors selected items from the inventory and reviewed inventory records to ensure these items were included in those records.
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Answer Key Test name: Chap 01_8e_Test Bank_Problem Material 1) 1. B, 2. C, 3. A, 4. C 2) 1. C, 2. B, 3. D 3) 1. E, 2. D, 3. B, 4. E, 5. C
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CHAPTER 2 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Control risk is A) the probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures. B) the probability that a material misstatement could occur and not be detected by auditors' procedures. C) the risk that auditors will not be able to complete the audit on a timely basis. D) the risk that auditors will not properly control the staff on the audit engagement.
2) The responsibilities principle under generally accepted auditing standards does not include which of the following? A) Competence and capabilities. B) Independent attitude. C) Due care. D) Planning and supervision.
3) Which of the following types of auditors' reports does not require additional information to support the opinion? A) Unmodified opinion. B) Adverse opinion. C) Qualified opinion. D) Disclaimer of opinion.
4) Which of the following is an element of a system of quality control that should be considered by a public accounting firm in establishing its quality control policies and procedures?
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A) Lending credibility to a client's financial statements. B) Using statistical sampling techniques. C) Acceptance and continuance of client relationships and specific engagements. D) Membership in the Center for Public Company Audit Firms.
5)
Which of the following presumptions does not relate to the reliability of audit evidence?
A) The more effective the client's internal control, the more assurance it provides about the accounting data and financial statements. B) The auditors' opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost. C) Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D) The independent auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly.
6)
An important role of the Public Company Accounting Oversight Board is to oversee the A) issuance of statements by the Financial Accounting Standards Board. B) preparation and grading of the Uniform CPA Examination. C) peer review of member firms of the Private Companies Practice Section. D) regulation of firms that audit issuers.
7)
Audit evidence is usually considered sufficient when
A) it is reliable. B) there is enough quantity to afford a reasonable basis for an opinion on financial statements. C) it has the qualities of being relevant, objective, and free from unknown bias. D) it has been obtained through random selection methods.
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8)
Which of the following is not considered a type of audit evidence? A) The entity's trial balance. B) Auditors' calculations. C) Physical observation. D) Verbal statements made by client personnel.
9) An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to: A) certify the correctness of Camden's financial statements. B) make a complete examination of Camden's records and verify all of Camden's transactions. C) give an opinion on the fair presentation of Camden's financial statements in conformity with the applicable financial reporting framework (e.g., GAAP, IFRS). D) give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions.
10)
Auditors try to achieve independence in appearance in order to: A) maintain public confidence in the profession. B) become independent in fact. C) comply with the responsibilities principle. D) maintain an unbiased mental attitude.
11) The preparation of an audit plan prior to the beginning of field work is appropriately considered documentation of A) planning. B) supervision. C) information evaluation. D) quality assurance.
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12)
Which of the following procedures would provide the most reliable audit evidence? A) Inquiries of the client's accounting staff held in private. B) Inspection of pre-numbered client shipping documents. C) Inspection of bank statements obtained directly from the client's financial institution. D) Analytical procedures performed by auditors on the client's trial balance.
13) Which of the following would most likely be a violation of the independence requirement found in the responsibilities principle under generally accepted auditing standards? A) An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients. B) The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm. C) An auditor on the engagement owns a financial interest in the stock of the client. D) The client provides financial support to a number of charitable causes that also receive support from the accounting firm.
14) A vendor's invoice received and held by the client would be considered what type of evidence? A) External. B) Internal. C) External-internal. D) Written representation.
15) Which of the following statements is generally correct about the appropriateness of audit evidence?
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A) Auditors' direct personal knowledge, obtained through observation and inspection, is of higher quality than information obtained indirectly from independent outside sources. B) To be reliable, audit evidence must be either valid or relevant, but need not be both. C) Client accounting data alone may be considered sufficient appropriate audit evidence to issue an unmodified opinion on client financial statements. D) Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
16) The standard auditors' report refers to standards of the PCAOB and GAAP in which section(s)? A) Standards of the PCAOB: Basis for Opinion; GAAP: Opinion on the Financial Statements. B) Standards of the PCAOB: Opinion on the Financial Statements; GAAP: Opinion on the Financial Statements and Basis for Opinion. C) Standards of the PCAOB: Opinion on the Financial Statements and Basis for Opinion; GAAP: Opinion on the Financial Statements. D) Standards of the PCAOB: Opinion on the Financial Statements; GAAP: Opinion on the Financial Statements.
17) Which of the following is not included in the auditors' standard report representing an unmodified opinion? A) A brief indication of the responsibility of auditors and management for the financial statements. B) An indication that all appropriate disclosures have been made and included in the financial statements. C) An indication that the audit was conducted in accordance with standards established by the PCAOB. D) The auditors' opinion on the fairness of the financial statements.
18)
Internal evidence
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A) is obtained directly from third parties independent of the client. B) originates outside of the client's system but has been received and processed by the client. C) consists of documents that are produced, used, and stored within the client's information system. D) consists of representations made by the client's officers, directors, owners, and employees.
19)
Which of the following presumptions is correct about the reliability of audit evidence?
A) Information obtained indirectly from outside sources is the most reliable form of audit evidence. B) To be reliable, audit evidence should be convincing rather than persuasive. C) Reliability of audit evidence refers to the amount of corroborative evidence obtained. D) An effective system of internal control provides more assurance about the reliability of audit evidence.
20)
The auditors' responsibility to express an opinion on the financial statements is
A) implicitly represented in the auditors' standard report. B) explicitly represented in the Opinion on the Financial Statements section of the auditors' standard report. C) explicitly represented in the Basis for Opinion section of the auditors' standard report. D) explicitly represented in the Critical Audit Matters section of the auditors' standard report.
21) Which of the following is not a concept from the performance principle under generally accepted auditing standards?
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A) The auditor must plan the work and properly supervise any assistants. B) The auditor must express an opinion in accordance with the auditor's findings. C) The auditor must obtain sufficient appropriate evidence about whether material misstatements exist. D) The auditor must determine and apply an appropriate materiality level throughout the audit.
22) Under generally accepted auditing standards, which of the following relates to the responsibilities principle? A) The initial planning of the audit engagement. B) The confirmation of accounts receivable. C) The completion of an internal control questionnaire. D) Maintaining professional skepticism and exercising professional judgment.
23) Which of the following represent audit quality guides that remain stable over time and are applicable for all audits? A) Auditing procedures. B) Auditing standards. C) Due care. D) System of quality control.
24) Which of the following situations would most likely be in conflict with the responsibilities principle?
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A) Auditors perform the engagement with the performance level expected of prudent auditors, but not expert auditors. B) Auditors obtain expertise in their client's industry as they are conducting the audit examination. C) Auditors are directly involved with a client manager in a strategic decision-making capacity. D) Auditors fail to document their assessment of control risk following their study of internal control.
25) Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high? A) Auditors would be required to rely on external (rather than internal) forms of evidence. B) Auditors would be required to perform procedures at interim periods, rather than at year end. C) Auditors would be required to confirm a larger number of customer accounts receivable balances. D) Auditors would be required to obtain more evidence through direct personal observation.
26)
As it relates to audit evidence, appropriateness refers to the A) originality of evidence gathered. B) quality of evidence gathered. C) quantity of evidence gathered. D) timeliness of evidence gathered.
27) Which of the following information would not be included in the auditors' standard report?
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A) The names of the financial statements audited. B) A description of the nature of an audit. C) An indication that all necessary disclosures have been presented. D) An opinion on the entity's financial statements.
28)
The primary purpose of the auditors' study of internal control for a non-issuer is: A) to provide constructive suggestions to the client for improving its internal control. B) to report on internal control as required by Auditing Standard No. 5. C) to identify and detect fraud and irregularities perpetrated by client personnel. D) to determine the nature, timing, and extent of further audit procedures.
29) Which reporting options do auditors have if the client's financial statements are not presented according to the applicable financial framework (e.g., GAAP, IFRS)? A) Unmodified opinion or disclaimer of opinion. B) Qualified opinion or disclaimer of opinion. C) Unmodified opinion or adverse opinion. D) Qualified opinion or adverse opinion.
30)
Which of the following statements is true with respect to the quality of audit evidence?
A) Quality is related to the relevance of evidence, but not the reliability of evidence. B) Evidence is considered of higher quality when gathered prior to year-end than following year-end. C) Evidence obtained under environments of stronger internal control is of higher quality than evidence obtained under environments of weaker internal control. D) In evaluating quality, sufficiency of evidence is of greater importance than appropriateness of evidence.
31)
Which of the following concepts is least related to the risk of material misstatement?
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A) Control risk. B) Detection risk. C) Inherent risk. D) Materiality.
32) Which of the following statements describes an appropriate relationship with respect to the reliability of audit evidence? A) Receiving confirmation from third parties as to the existence of securities is more reliable than the auditors' personal inspection of those securities. B) Verbal inquiries received from the client regarding sales made to customers are more reliable than sales invoices prepared by the client for its customers. C) A bank confirmation received directly by the auditor is more reliable than a bank confirmation initially received by the client and forwarded to the auditor. D) Evidence drawn from a document prepared by the client is more reliable than evidence drawn from a document prepared by an external party that is forwarded to the auditor by the client.
33) A periodic review of an audit firm's system of quality control by the PCAOB is referred to as a(n): A) inspection. B) peer review. C) principles review. D) quality review.
34)
The performance principle would include all of the following except:
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A) the auditors' determination of materiality levels. B) the auditors' evaluation of independence with respect to their clients. C) the auditors' evaluation of the risk of material misstatement. D) the auditors' determination of the nature, timing, and extent of further audit procedures.
35)
Which of the following is most closely associated with the responsibilities principle? A) Due care. B) Planning. C) Qualified audit opinion. D) Risk of material misstatement.
36) Which of the following statements is not true with respect to the responsibility for establishing generally accepted auditing standards? A) The PCAOB issues auditing standards for the audit of issuers, subject to SEC approval. B) Standards issued by the Auditing Standards Board after 2003 apply to the audits of both issuers and non-issuers. C) The Auditing Standards Board currently issues auditing standards for the audit of non-issuers. D) Prior to the Sarbanes-Oxley Act, the Auditing Standards Board issued auditing standards for the audits of both issuers and non-issuers.
37)
Which of the following would normally be considered earliest in the audit examination? A) Determination of materiality levels for use during the audit. B) Consideration of the ability of the entity's internal control to prevent or detect errors. C) Preparation of a written audit plan. D) Evaluation of the type of audit opinion to be issued, based on the auditor's findings.
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38) The state of mind that characterizes the auditors' appropriate questioning and critical assessment of audit evidence is referred to as: A) due care. B) independence in appearance. C) professional judgment. D) professional skepticism.
39)
Which of the following is least related to the concept of independence in appearance?
A) The auditors' objectivity and ability to act impartially toward the client. B) The perceptions of individuals who rely on the financial statements and auditors' opinion on the financial statements. C) The ownership of a financial interest in a client by the auditor. D) The employment of the auditor's family member in an important position with the client.
40) The concept of _____ recognizes that a GAAS audit may fail to detect all material misstatements. A) absolute assurance B) due care C) reasonable assurance D) risk of material misstatement
41)
Generally accepted auditing standards are
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A) specific actions performed by auditors during an examination. B) standards that guide the conduct of an audit examination. C) legal requirements auditors must observe during the audits of issuers. D) standards used by entities in deciding whether to engage or retain the services of auditors.
42) Which of the following could serve as a source of professional guidance in the audit of an issuer? Auditing Standards Issued by the PCAOB Yes Yes No No
A. B. C. D.
Statements on Auditing Issued by the ASB No Yes Yes No
A) Option A B) Option B C) Option C D) Option D
43) Which of the following is not true with respect to the responsibilities for establishing generally accepted auditing standards? A) Auditing standards for both issuers and non-issuers must be formally approved by the Securities and Exchange Commission. B) Interpretive publications are issued by the AICPA to provide guidance on the application of generally accepted auditing standards in specific circumstances. C) The PCAOB is the body with formal authority for the creation of auditing standards for the audits of issuers. D) If specific guidance is not provided by PCAOB Auditing Standards, auditors may refer to Statements on Auditing Standards that have not been amended or superseded.
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44)
Which of the following is not related to the responsibilities principle?
A) Continuing professional education to ensure that professionals' knowledge keeps pace with changes in the accounting and auditing profession. B) Firm-wide policies to evaluate the financial and professional relationships of its professionals. C) Specific auditing procedures designed to determine the effectiveness of the entity's internal control over financial reporting. D) The auditors' use of professional judgment throughout the examination.
45) A level of performance that would be exercised by reasonable auditors in similar circumstances is referred to as A) due care. B) independence. C) professional judgment. D) professional skepticism.
46) During which stages of an audit examination are auditors required to exhibit the appropriate use of professional judgment? Gathering Evidence
Drawing Conclusions
Yes Yes No No
No Yes Yes No
A. B. C. D.
A) Option A B) Option B C) Option C D) Option D
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47)
Which of the following is not true with respect to the concept of reasonable assurance?
A) Reasonable assurance allows for mistakes and misinterpretations by the audit team throughout the examination. B) The nature of many audit procedures is such that they cannot always be relied upon to detect misstatements. C) Audit teams should evaluate all transactions and components of an account balance or class of transactions. D) Auditors should control the overall risk in an audit to an acceptably low level.
48)
A. B. C. D.
Which of the following factors influences the risk of material misstatement? Susceptibility of the Account Balance to Misstatement Yes Yes No No
Nature, Timing, and Extent of Further Audit Procedures No Yes Yes No
A) Option A B) Option B C) Option C D) Option D
49)
Which of the following is not true with respect to the auditors' report for an issuer?
A) The report title should contain the word "independent." B) The report provides a detailed listing of major auditing procedures performed during the examination. C) The opinion assesses the financial statements against an applicable financial reporting framework. D) The report specifically identifies the financial statements and years examined by the auditor.
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50) Which of the following section(s) references the requirement of auditors to be independent? A) Opinion on the Financial Statements section. B) Basis for Opinion section. C) Critical Audit Matters section. D) Opinion on the Financial Statements section and Basis for Opinion section.
51)
Which of the following is true with respect to the PCAOB inspection process?
A) All firms performing audits of issuers are inspected every year. B) PCAOB inspections are conducted by partners of other CPA firms. C) PCAOB inspection teams review a sample of audit engagements conducted by the firm as well as the firm's system of quality control. D) Deficiencies from sample audit engagements reviewed by the inspection team and deficiencies in the firm's system of quality control are publicly disclosed on the PCAOB's website.
52)
Which of the following would be evaluated during the PCAOB inspection process?
A. B. C. D.
Firm's system of quality control Yes Yes No No
Financial viability of the firm No Yes Yes No
A) Option A B) Option B C) Option C D) Option D
53) The Public Company Accounting Oversight Board was established by which of the following? Version 1
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A) The Financial Accounting Standards Board. B) The American Institute of Certified Public Accountants. C) The Sarbanes-Oxley Act of 2002. D) The International Accounting Standards Board.
54) Which of the following types of audit evidence provides the least assurance of reliability? A) Receivable confirmations received from the client’s customers. B) Prenumbered receiving reports completed by the client's employees. C) Prior months' bank statements obtained from the client. D) Municipal property tax bills prepared in the client's name.
55) A CPA firm would provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by A) establishing an understanding with each client concerning individual responsibilities in a signed engagement letter. B) assessing the risk that errors and fraud may cause the financial statements to contain material misstatements. C) developing specific audit objectives to support management's assertions that are embodied in the financial statements. D) maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
56) Which of the following courses of action is most appropriate if an auditor concludes that there is a high risk of material misstatement? A) Use smaller, rather than larger, sample sizes. B) Perform substantive tests as of an interim date. C) Select more effective substantive tests. D) Increase tests of controls.
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57) Which of the following actions should a CPA firm take to comply with the AICPA's quality control standards? A) Establish procedures that comply with the standards of the Sarbanes-Oxley Act. B) Use attributes sampling techniques in testing internal controls. C) Consider inherent risk and control risk before determining detection risk. D) Establish policies to ensure that the audit work meets applicable professional standards.
58)
Which of the following is a definition of control risk?
A) The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls B) The risk that the auditor will not detect a material misstatement C) The risk that the auditor's assessment of internal controls will be at less than the maximum level D) The susceptibility of material misstatement assuming there are no related internal control policies or procedures
59) Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? A) Presumptive B) Judgmental C) Criticizing D) Questioning
60)
An independent auditor must have which of the following?
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A) A pre-existing and well-informed point of view with respect to the audit B) Technical training that is adequate to meet the requirements of a professional C) A background in many different disciplines D) Experience in taxation that is sufficient to comply with generally accepted auditing standards
61) What type of evidence would provide the highest level of assurance in an attestation engagement? A) Evidence secured solely from within the entity. B) Evidence obtained from independent sources. C) Evidence obtained indirectly. D) Evidence obtained from multiple internal inquiries.
62)
Which of the following is an important consideration during the planning of the audit?
A) Considering the independence of members of the audit team B) Performing some of the audit procedures prior to the end of the year under audit C) Considering the ability and expertise of the audit team with respect to accounting and auditing issues in the client's industry D) Considering the impact of tests of controls on the overall assessment of control risk
63)
The initial development of auditing standards was in response to
A) a scandal involving embezzlement that was not detected during an audit engagement. B) auditors' concerns that all components of the financial statements were not being verified. C) independent inquiries of the public accounting profession made by the SEC. D) requests by companies for greater assurance with respect to the auditors' ability to detect financial statement misstatements.
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64) All of the following statements are true regarding generally accepted auditing standards (GAAS) except: A) departures from auditing standards that impose presumptively mandatory requirements on auditors are not permitted under any circumstances. B) Auditing Standards issued by the PCAOB serve as an appropriate source of GAAS for the audits of issuers. C) separate auditing standards have been developed for the audits of U.S. governmental entities and foreign entities. D) Interpretive Publications, which are officially considered less authoritative and less binding than auditing standards, are included as part of GAAS.
65) The particular and specialized actions that auditors undertake to obtain evidence in a specific audit engagement are known as A) Auditing Standards. B) audit procedures. C) Interpretive Publications. D) Statements on Auditing Standards.
66) The role of the Public Company Accounting Oversight Board in the standard-setting process is to develop A) Statements on Auditing Standards for the audits of non-issuers. B) Auditing Standards for the audits of issuers. C) Governmental Auditing Standards for the audits of governmental entities. D) International Standards on Auditing for the audits of foreign entities.
67) Pronouncements issued by the Public Company Accounting Oversight Board are subject to formal approval by the
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A) American Institute of Certified Public Accountants. B) Auditing Standards Board. C) International Auditing and Assurance Standards Board. D) Securities and Exchange Commission.
68)
The three fundamental principles underlying GAAS include all of the following, except: A) general principle. B) performance principle. C) reporting principle. D) responsibilities principle.
69) The fundamental principles developed by the Auditing Standards Board are best described as: A) ten basic standards underlying an audit. B) standards that apply only to audits of issuers. C) industry-specific guidance on how audit procedures should be conducted. D) guidelines for the general conduct of audit engagements.
70) The relevant ethical requirements relating to due care, professional skepticism, and professional judgment are responsibilities of the auditor at which stage(s) of the audit? A. B. C. D.
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Audit Evidence
Yes Yes No No
No Yes Yes No
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A) Option A B) Option B C) Option C D) Option D
71) Which of the following does not directly relate to an auditor's responsibility for having appropriate competence and capabilities to perform the audit? A) Participating in continuing professional education B) Gaining experience through hands-on practice C) Obtaining reliable documentary evidence D) Attending on-the-job training
72)
Which of the following situations would result in the issuance of a disclaimer of opinion?
A) The audit reveals weaknesses in the client's internal control over financial reporting. B) The auditor is discovered to own a financial interest in the entity. C) The audit is performed, with limited exception, in accordance with generally accepted auditing standards. D) The entity's financial statements are not presented in conformity with the applicable financial reporting framework.
73) In a system of quality control, leadership responsibilities for quality within the firm are best characterized by: A) basing personnel performance evaluations on the employees' ability to generate revenues from existing clients or by acquiring new clients. B) management's evaluation of the integrity and business reputation of the client. C) management's clear and consistent demonstration of its own commitment to quality control and high-quality work. D) assigning management responsibilities in such a manner that commercial considerations are the firm's top priority.
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74) The audit failures of both Enron and WorldCom were examples in which the leadership responsibilities for quality work within the accounting firm were overshadowed by fears that losing a key client would A) result in shareholder losses from reduced company profitability. B) require additional audit procedures and increase the fees paid by the companies to the accounting firm. C) negatively influence the results of the firm's inspection. D) negatively impact individual auditors' performance evaluations.
75) Which of the following is an example of the appropriate implementation of a system of quality control? A) The firm requires all documents obtained during the audit to be destroyed immediately following the engagement to ensure the client's information remains confidential. B) The firm's quality control policies have evolved through the performance of audit procedures but are not formally developed or communicated to staff members. C) All firm employees must verbally confirm their compliance with the appropriate independence requirements before being assigned to an engagement. D) The firm uses manuals and standardized forms for audit documentation to help ensure engagement performance objectives and quality standards are met.
76) An internal evaluation of the significant judgments made by the audit team and the conclusions reached in formulating its report for engagements meeting specified criteria is known as a(n): A) engagement quality control review. B) inspection. C) peer review. D) performance control evaluation.
77) Which element of a system of quality control strives to provide the firm with reasonable assurance that its policies and procedures are operating effectively? Version 1
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A) Human resources B) Leadership responsibilities for quality within the firm C) Monitoring D) Relevant ethical requirements
78) When a firm decides to withdraw from an engagement, it should document all of the following except: A) significant issues influencing the decision to withdraw from the engagement. B) the basis for any conclusions related to this decision to withdraw from the engagement. C) significant consultations related to the decision to withdraw from the engagement. D) significant effects the decision to withdraw from the engagement could have on the firm.
79) Firm A performs audits of 60 issuers, while firm B performs audits of 120 issuers. How often must each firm undergo a PCAOB inspection? A) Both firm A and firm B will be inspected every other year. B) Firm A will be inspected annually and firm B will be inspected every three years. C) Firm A will be inspected every three years and firm B will be inspected annually. D) Both firm A and firm B will be inspected annually.
80)
PCAOB inspections are conducted by
A) individuals selected by the PCAOB who are not current employees of public accounting firms. B) another public accounting firm selected by the firm being inspected. C) current employees of another public accounting firm selected by the PCAOB. D) the AICPA's Public Oversight Board.
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81) All of the following are examples of procedures a firm can use to monitor its system of quality control except: A) discussions with firm personnel. B) conducting reviews of engagement documentation. C) devoting sufficient resources to developing a system of quality control. D) assessing compliance with independence policies and procedures.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 82) Alan Fallon was recently promoted to senior accountant. He was put in charge of the Mellow Markets audit because of his experience with other grocery clients. Mellow Markets has a small, but growing, chain of natural food stores. This is the first year Mellow Markets has been audited. Because of their growth, Mellow Markets needs additional capital and intend to use their audited financial statements to secure a loan. Alan has been assigned two inexperienced staff assistants for the audit. Because this is his first engagement as a senior, he intends to bring the job in on budget. To save time, he provided his assistants with a copy of the audit plan for Happy Time Food Stores. He told them that this would make things go more quickly. He also told them that he could not spend much time with them at the client's place of business, because "my time is billed out at such a high rate, we'll go right over budget." However, he did call them once a day from another audit on which he was working. After beginning their work, the assistants told Alan that the audit plan did not always match up with what they found at Mellow Markets. Alan responded, "just cross out whatever is not relevant in the audit plan and don't add anything – it will only make us go over the budget." When Alan came to the client near the end of field work, one assistant was concerned that no inventory observation was done at the out-of-town locations of Mellow Markets (the audit plan had stipulated that inventory should be observed for in-town stores only). Happy Time had only one out-of-town location, while three of Mellow Markets' five stores were in other cities. Alan told the assistant to get inventory sheets from the client for the other stores and added "make sure that the inventory balance in the general ledger agrees with the total for all the inventory sheets." The next day, Alan reviewed all audit documentation and submitted the job for review by the manager. Required: 1. Describe the performance principle of GAAS. 2. Do you believe that the Mellow Markets audit complies with the performance principle? Explain.
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Answer Key Test name: Chap 02_8e_Test Bank 1) A 2) D 3) A 4) C 5) B 6) D 7) B 8) A 9) C 10) A 11) A 12) C 13) C 14) C 15) A 16) C 17) B 18) C 19) D 20) C 21) B 22) D 23) B 24) C 25) B 26) B Version 1
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27) C 28) D 29) D 30) C 31) B 32) C 33) A 34) B 35) A 36) B 37) A 38) D 39) A 40) C 41) B 42) B 43) A 44) C 45) A 46) B 47) C 48) A 49) B 50) B 51) C 52) A 53) C 54) B 55) D 56) C Version 1
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57) D 58) A 59) D 60) B 61) B 62) B 63) A 64) A 65) B 66) B 67) D 68) A 69) D 70) B 71) C 72) B 73) C 74) D 75) D 76) A 77) C 78) D 79) C 80) A 81) C
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82) According to the performance principle, to obtain reasonable assurance, which is high but not an absolute level of assurance, the auditor: 1.Plans the work and properly supervises any assistants. 2.Determines and applies appropriate materiality level or levels throughout the audit. 3.Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control. 4.Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks. The Mellow Markets audit does not comply with the performance principle. With respect to planning, the failure to prepare an appropriate audit plan and lack of time and attention the inexperienced staff received from Alan violate the performance principle. In addition, there is no indication that any steps were taken to either understand the client's business or its internal control. Finally, these deficiencies suggest that the appropriate procedures were not performed to collect sufficient appropriate evidence. Further, the lack of a relevant plan to observe inventory in other cities and Alan's decision to limit inventory procedures to agreeing the inventory sheets and the general ledger inventory balance demonstrates the failure to gather sufficient appropriate evidence and represents an overall violation of the performance principle.
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CHAPTER 2: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) For each of the items below, indicate through the appropriate letter the fundamental principle to which the item is most closely related. A.Responsibilities principle B.Performance principle C.Reporting principle
___ ___
___
___ ___
___ ___ ___
___ ___
1. Maintaining professional skepticism. 2. An auditors’ overall conclusion of the fairness of the client’s financial statements. 3. The use of an audit plan to identify audit procedures to be performed during the engagement. 4. Auditors’ assessment of the risk of material misstatement. 5. Accounting firm policies with respect to the level of expected continuing professional education. 6. Expressing an opinion in accordance with the auditor’s findings. 7. Proper supervision of assistants on the audit.c 8. Auditors’ requests to obtain bank statements directly from financial institutions with whom the client does business. 9. An indication that an opinion cannot be expressed. 10. Determining and applying an appropriate materiality level.
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2) For each of the statements below, indicate through the appropriate letter whether it relates to the PCAOB, Auditing Standards Board, both the PCAOB and Auditing Standards Board, or neither the PCAOB nor Auditing Standards Board. A.PCAOB B.Auditing Standards Board C.Both PCAOB and Auditing Standards Board D.Neither PCAOB nor Auditing Standards Board
___ ___ ___ ___ ___
1. Conducts inspections of firms that audit issuers. 2. Pronouncements may be used in the audit of non-issuers. 3. Pronouncements may be used in the audit of issuers. 4. Was created by the Sarbanes Oxley Act of 2002. 5. Involved with the certification and licensure of public accountants. ___ 6. Issues Statements on Auditing Standards. ___ 7. Conducts peer reviews of firms that audit non-issuers. ___ 8. Sanctions individual auditors for violations of generally accepted auditing standards.
3) For each of the items below, indicate through the appropriate letter the element of a system of quality control to which it is most closely related. A.Leadership responsibilities B.Relevant ethical requirements C.Acceptance and continuance of clients D.Human resources E.Engagement performance F.Monitoring
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___ ___
___
___
___
___ ___
___
___ ___
1. Reviewing selected administrative and personnel records. 2. Obtaining written confirmations regarding compliance with appropriate independence requirements. 3. Ensuring that financial considerations do not override the quality of work performed. 4. Establishing policies and procedures for resolving differences of opinion within the engagement team. 5. Devoting sufficient resources for developing, communicating, and supporting the firm’s quality control policies and procedures. 6. Evaluating the integrity and business reputation of the client. 7. Identifying circumstances and relationships that create threats to auditor independence. 8. Ensuring the firm’s ability to perform the engagement with an appropriate level of professional competence. 9. Maintaining engagement documentation for an appropriate period of time. 10. Assessing the appropriateness of the firm’s guidance materials and professional aids.
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Answer Key Test name: Chap 02_8e_Test Bank_Problem Material 1) 1. A; 2. C; 3. B; 4. B; 5. A; 6. C; 7. B; 8. B; 9. C; 10. B 2) 1. A; 2. B; 3. C; 4. A; 5. D; 6. B; 7. D; 8. D 3) 1. F; 2. B; 3. A; 4. E; 5. A; 6. C; 7. B; 8. C; 9. E; 10. F
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CHAPTER 3 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Which of the following auditor concerns most likely could be so serious that the auditor would conclude that a financial statement audit cannot be conducted? A) The entity has no formal written code of conduct. B) The integrity of entity's management is suspect. C) Procedures requiring separation of duties are subject to management override. D) Management fails to modify prescribed controls for changes in conditions.
2)
Before accepting an engagement to audit a new client, an auditor is required to:
A) make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B) obtain the prospective client's signature to the engagement letter. C) prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D) discuss the management representation letter with the prospective client's audit committee.
3) Which of the following statements is most accurate regarding sufficient and appropriate documentation? A) Accounting estimates are not considered sufficient and appropriate documentation. B) Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed. C) If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers. D) Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.
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4) When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?
A) Considering unaudited account balances and ratios to calculate what adjusted balances should be. B) Comparing current-year account balances to balances of one or more comparable periods. C) Considering the pattern of several unusual changes without trying to explain what caused them. D) Comparing client data with client-determined expected results to reduce detailed tests of account balances.
5) Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective? A) The audit is being performed soon after the balance sheet date. B) Audit staff are experienced in performing the planned procedures. C) Analytical procedures have revealed no unusual or unexpected results. D) There were many transactions posted to the account during the period.
6) Which of the following steps should an auditor perform first to determine the existence of related parties? A) Examine invoices, contracts, and purchasing orders. B) Request a list of related parties from management. C) Review the company's business structure. D) Review proxy and other materials filed with the SEC.
7) Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?
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A) Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present. B) The firm must address all independence impairment issues on the date of the audit opinion. C) Communications related to independence may occur in any form prior to issuance of the financial statements. D) Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
8)
Before accepting an engagement to audit a new client, a CPA is required to obtain: A) an assessment of fraud risk factors likely to cause material misstatements. B) an understanding of the prospective client's industry and business. C) the prospective client's signature to a written engagement letter. D) the prospective client's consent to make inquiries of the predecessor, if any.
9) During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing. Tests of controls
Substantive Tests
Yes Yes No No
Yes No Yes No
A. B. C. D.
A) Option A B) Option B C) Option C D) Option D
10)
When assessing internal auditors' objectivity, an independent auditor should:
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A) consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. B) review the internal auditors' reports to determine that their conclusions are consistent with the work performed. C) verify that the internal auditors' assessment of control risk is comparable to the independent auditor's assessment. D) evaluate the quality of the internal auditors' working paper documentation and their recent audit recommendations.
11) Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit? A) Make inquiries of the client's lawyer concerning pending litigation. B) Perform cutoff tests of cash receipts and disbursements. C) Compare financial information with nonfinancial operating data. D) Recalculate the prior year's accruals and deferrals.
12)
Which of the following matters does an auditor usually include in the engagement letter? A) Arrangements regarding fees and billing. B) Analytical procedures that the auditor plans to perform. C) Indications of negative cash flows from operating activities. D) Identification of working capital deficiencies.
13) Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? A) The reporting status of the internal auditor within the organization. B) The educational level and professional experiences of the internal auditor. C) Whether policies prohibit the internal auditor from auditing areas where relatives are employed. D) Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.
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14) Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? A) Disagreements between the predecessor auditor and management as to significant accounting policies and principles. B) The predecessor auditor's understanding of the reasons for the change of auditors. C) Facts known to the predecessor auditor that might bear on the integrity of management. D) Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.
15) Which of the following factors most likely would cause an auditor not to accept a new audit engagement? A) An inadequate understanding of the entity's internal controls. B) The close proximity to the end of the entity's fiscal year. C) Concluding that the entity's management probably lacks integrity. D) The inability to perform preliminary analytical procedures before assessing control risk.
16)
The auditor is not required to ask the predecessor auditor about:
A) facts that might bear on the integrity of management. B) disagreements the predecessor may have had with management about accounting principles and audit procedures. C) the fees charged for the previous audit. D) the predecessor's understanding about the reasons for the change of auditors.
17)
Audit documentation does not normally include the: A) specific assertions under audit. B) industry accounting guides. C) record of the procedures performed. D) decisions made in the course of the audit.
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18) C. Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was K. Post, CPA, whom Monday has notified by that its services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post? A) Hill, the auditor. B) Post, the predecessor auditor. C) Monday's controller or CFO. D) The chair of Monday's board of directors.
19) Which of the following provides the best method of obtaining an understanding of a continuing client's business for planning an audit? A) Performing tests of details of transactions and balances. B) Reviewing prior year audit documentation and the permanent file for the client. C) Reading specialized industry journals. D) Reevaluating the client's internal control environment.
20) The pre-engagement activities of an audit engagement for a public accounting firm do not include: A) evaluating the public accounting firm's independence with regard to the audit engagement. B) obtaining predecessor audit documentation. C) obtaining an engagement letter. D) ensuring that there are sufficient firm resources to complete the engagement on a timely basis.
21) Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
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A) Inquiring of the client's legal counsel concerning pending litigation. B) Comparing the financial statements to anticipated results. C) Examining computer-generated exception reports to verify the effectiveness of internal controls. D) Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.
22)
This year, Blakeney Enterprises engaged a new auditor who must:
A) attempt to communicate with the predecessor auditor before accepting the engagement. B) review the predecessor's audit documentation if the audit is to be in accordance with GAAS. C) seek the SEC's permission to accept the engagement if Blakeney is publicly owned. D) reject the engagement if the change in auditors resulted from a dispute with the predecessor.
23)
An engagement letter is used primarily to: A) ensure a clear contractual understanding of the services to be provided by the CPA. B) express an opinion on the financial statements. C) provide management representations to be included in the audit evidence. D) disclaim liability.
24) The firm of Banta, Brown, and Burgess, CPAs, requires that audit documentation contain the initials of the preparer and the reviewer in the top right-hand corner. This procedure provides evidence of professional concern regarding which generally accepted auditing standard? A) Independence. B) Adequate technical competence and capabilities. C) Adequate planning and supervision. D) Gathering sufficient competent evidence.
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25)
During the initial planning phase of an audit, a CPA most likely would:
A) test specific internal control activities that are likely to prevent fraud. B) evaluate the reasonableness of the client's accounting estimates of inventory obsolescence. C) discuss the timing of the audit procedures with the client's management. D) inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.
26) Prior to beginning the fieldwork on a new audit engagement in which the audit team does not possess expertise in the industry in which the client operates, the audit team should: A) reduce audit risk by lowering the preliminary levels of materiality. B) design special substantive tests to compensate for the lack of industry expertise. C) engage financial experts familiar with the nature of the industry. D) obtain knowledge of matters that relate to the nature of the entity's business.
27)
Which of the following is not a category of audit documentation? A) Temporary files. B) Permanent files. C) Audit administrative files. D) Current documentation files.
28) For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? A) Assessment of inherent risk, yes; assessment of control risk, yes. B) Assessment of inherent risk, yes; assessment of control risk, no. C) Assessment of inherent risk, no; assessment of control risk, yes. D) Assessment of inherent risk, no; assessment of control risk, no.
29)
Which of the following is not considered an accounting estimate?
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A) Allowance for loan losses. B) Credit sales. C) Net realizable value of inventory. D) Percentage-of-completion revenue to be recorded.
30)
Which of the following would be a step in an internal control program? A) Obtain an aged trial balance of the accounts receivable. B) Prepare and send confirmations on a sample of customers' accounts receivable. C) Assess the control risk for sales and collections. D) Read sales contracts for evidence of customers' rights of return or price allowance
terms.
31)
The idea of the cycle approach is to group accounts together by: A) specific function. B) financial statement assertion. C) audit objective. D) transactions that affect all accounts in that particular group.
32)
Which of the following is not one of the four major cycles? A) Revenue and cash collection. B) Acquisition and expenditure. C) Cash receipts and disbursements. D) Financing and investing.
33)
Looking at vendors' invoices for particular information is an example of:
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A) physical observation. B) confirmation. C) inspection of documents. D) scanning.
34) An auditor who uses 7 percent of income before taxes as a basis for overall materiality would be basing judgment on: A) absolute size. B) relative size. C) nature of the item. D) cumulative effects.
35) Which of the following is not a way in which auditors use the concept of overall materiality? A) As a guide to planning the audit plan. B) As a guide to the evaluation of evidence. C) As a guide for making decisions about the audit report. D) As a guide for assessing control risk.
36) The auditor looked at a bank statement received and held by the client. What kind of audit procedure would this be considered? A) Recalculation. B) Physical observation. C) Confirmation. D) Examination of documents.
37)
In testing the existence assertion for an asset, an auditor ordinarily works from the:
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A) financial statements to the potentially unrecorded items. B) potentially unrecorded items to the financial statement. C) accounting records to the supporting evidence. D) supporting evidence to the accounting records.
38) In determining whether transactions have been recorded, the direction of the audit testing should start from the: A) general ledger balances. B) adjusted trial balance. C) original source documents. D) general journal entries.
39)
Auditors should design the written audit plan so that:
A) all material transactions will be selected for substantive testing. B) substantive tests prior to the balance sheet date will be minimized. C) the audit procedures selected will achieve specific audit objectives. D) each account balance will be tested under either tests of controls or tests of transactions.
40) In designing written audit plans, an auditor should establish specific audit objectives that relate primarily to the: A) timing of audit procedures. B) cost-benefit of gathering techniques. C) selected audit techniques. D) financial statement assertions.
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41) In considering overall materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements aggregating: A) $10,000. B) $15,000. C) $20,000. D) $30,000.
42) The independent auditors' audit design prepared prior to the start of fieldwork is appropriately considered documentation of: A) planning. B) supervision. C) information evaluation. D) quality assurance.
43)
In the preparation of an audit plan, which of the following items is not essential? A) A review of material from prior audits. B) The preparation of a budget identifying the costs of resources needed. C) An understanding of controls established by management. D) Assessment of inherent risk.
44) To satisfy the valuation assertion when auditing an investment in another company that is publicly and actively traded, an auditor most likely would seek to:
A) inspect the stock certificates evidencing the investment. B) examine the audited financial statements of the investee company. C) review the broker's advice or canceled check for the investment's acquisition. D) obtain market quotations from The Wall Street Journal or another independent source.
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45) Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of: A) presentation and disclosure. B) completeness. C) rights and obligations. D) existence.
46) Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories? A) Trace test counts noted during the physical count of inventory to the summarization of quantities. B) Inspect agreements for evidence of inventory held on consignment. C) Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales. D) Inspect the open purchase order file for significant commitments to consider for disclosure.
47) During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertion: A) existence or occurrence. B) completeness. C) valuation or allocation. D) presentation and disclosure.
48) Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
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A) Tracing amounts in the subsidiary ledger to details on shipping documents. B) Comparing receivable turnover rates to industry statistics for reasonableness. C) Inquiring about receivables pledged under loan agreements. D) Assessing the allowance for uncollectible accounts for reasonableness.
49) An auditor most likely would inspect additions to the audit client's Property, Plant, and Equipment account to obtain evidence concerning management's assertions about: A) existence or occurrence. B) rights and obligations. C) presentation and disclosure. D) valuation or allocation.
50) Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable? A) Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for. B) Receiving the client's unopened mail for a reasonable period of time after year-end to search for unrecorded vendor's invoices. C) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. D) Confirming accounts payable balances with known vendors and suppliers who have zero balances at year-end.
51) An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of: A) rights and obligations. B) completeness. C) presentation and disclosure. D) existence or occurrence.
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52) In auditing accrued liabilities, an auditor's procedures most likely would focus primarily on management's assertion of: A) existence or occurrence. B) completeness. C) presentation and disclosure. D) valuation or allocation.
53) An auditor selected items for test counts from a client's inventory listing before observing the client's physical inventory at the warehouse. The auditor then found the items selected at the warehouse and counted them. This procedure most likely obtained evidence concerning management's assertion of: A) rights and obligations. B) completeness. C) existence or occurrence. D) valuation.
54) An auditor tests an entity's control that matches shipping documents to sales invoices before they are recorded in the financial statements as revenue in support of management's financial statement assertion of: A) valuation or allocation. B) presentation and disclosure. C) existence or occurrence. D) rights and obligations.
55) Which of the following audit procedures would an auditor most likely perform to test controls relating to management's valuation assertion for accounts receivable?
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A) Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed. B) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. C) Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list. D) Inquire about the entity's credit-granting policies and test whether credit checks have been consistently applied to new customers.
56) The confirmation of a cash balance provides primary evidence regarding which management assertion? A) Existence. B) Valuation. C) Allocation. D) Completeness.
57) The confirmation of an accounts receivable balance provides primary evidence regarding which management assertion? A) Completeness. B) Valuation. C) Allocation. D) Existence.
58) In testing the completeness assertion for a liability account, an auditor ordinarily works from the: A) financial statements to the potentially unrecorded items. B) potentially unrecorded items to the financial statements. C) accounting records to the supporting evidence. D) trial balance to the subsidiary ledger.
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59) An auditor's purpose in auditing the information contained in the pension footnote most likely is to obtain evidence concerning management's assertion about: A) rights and obligations. B) existence. C) presentation and disclosure. D) valuation.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 60) Explain the bottom-up approach and the top-down approach to quantifying overall materiality.
61) Do the following regarding auditors' concepts of overall "materiality" considered at the planning stage (i.e., "planning materiality"). a.Define or describe independent auditors' concept of "planning materiality." b.Name (but do not describe or explain) three common relationships or considerations used by auditors when assessing the dollar amount considered to be material.
62)
Identify the two types of audit plans and indicate the purpose of each.
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63) D. Jackson, CPA, audited Washington Company's financial statements for the year ended December 31, 2017. On November 1, 2018, Washington notified Jackson that it was changing auditors and that Jackson's services were being terminated. On November 5, 2018, Washington invited Lincoln, CPA, to make a proposal for an engagement to audit its financial statements for the year ended December 31, 2018. Required: What procedures concerning Jackson should Lincoln perform before accepting the engagement?
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Answer Key Test name: Chap 03_8e_Test Bank 1) B 2) A 3) B 4) B 5) C 6) B 7) D 8) D 9) A 10) A 11) C 12) A 13) B 14) D 15) C 16) C 17) B 18) A 19) B 20) B 21) B 22) A 23) A 24) C 25) C 26) D Version 1
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27) A 28) D 29) B 30) C 31) D 32) C 33) C 34) B 35) D 36) D 37) C 38) C 39) C 40) D 41) A 42) A 43) B 44) D 45) B 46) B 47) D 48) D 49) A 50) C 51) B 52) B 53) C 54) C 55) D 56) A Version 1
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57) D 58) B 59) C 60) In the bottom-up approach to judging materiality, amounts in each account are judged separately and then combined to determine the overall effect. In the top-down approach to judging materiality, an overall material amount is determined for the financial statements and then allocated to each particular account. 61) a.Planning materiality is the largest amount of uncorrected dollar misstatement the auditors believe could exist in published financial statements without causing them to be considered materially misleading. b.Absolute size, relative size, nature of the item or issue, circumstances, uncertainty, cumulative effects. 62) The two types of audit plans are (1) the internal control program and (2) the substantive audit plan. The internal control program contains the specification of procedures for obtaining an understanding of the entity's business and environment, including its internal control, and for assessing the inherent risk and the control risk related to the financial account balances. The substantive audit plan contains the specification of substantive tests for gathering direct evidence on the assertions about dollar amounts in the account balances.
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63) a.Lincoln should explain to Washington the need to make an inquiry of Jackson and should request permission to do so. b.Lincoln should ask Washington to authorize Jackson to respond fully to Lincoln's inquiries. c.If Washington refuses to permit Jackson to respond or limits Jackson's response, Lincoln should inquire as to the reasons and consider the implications in deciding whether to accept the engagement. d.Lincoln should make specific and reasonable inquiries of Jackson regarding matters Lincoln believes will assist in determining whether to accept the engagement, including specific questions regarding. e.(1) Facts that might bear on the integrity of management. f.(2) Disagreements with management as to accounting principles, audit procedures, or other similarly significant matters. g.(3) Communications Jackson made to management about fraud, illegal acts, or internal control recommendations. h.(4) Jackson's understanding as to the reasons for the change of auditors. i.If Lincoln receives a limited response, Lincoln should consider its implications in deciding whether to accept the engagement.
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CHAPTER 3: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) For each of the descriptions 1-6, match the correct word or phrase from A-H. A.Inspections of tangible assets B.Confirmation C.Tracing D.Vouching E.Inquiry F.External-internal evidence G.Audit plan H.Substantive procedures
___ 1. Documentation prepared by independent parties and sent to the client. ___ 2. Proceeding forward through the accounting and control system from the evidence to the financial statements. ___ 3. Audit of details of transactions and balances. ___ 4. Audit procedure that provides compelling evidence of existence. ___ 5. Direct correspondence with independent parties. ___ 6. A list of audit procedures.
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Answer Key Test name: Chap 03_8e_Test Bank_Problem Material 1) 1. F; 2. C; 3. H; 4. A; 5. B; 6. G
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CHAPTER 4 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The major emphasis in GAAS related to consideration of fraud in a financial statement audit (AU-C 240) is on: A) employee misappropriation of assets. B) management fraud. C) client fraud on customers. D) employee embezzlement.
2)
Management fraud generally refers to: A) unintentional mistakes. B) noncompliance. C) intentional distortions of financial statements. D) violations of GAAS.
3)
External auditors are responsible:
A) for authenticating documents. B) for reporting immaterial frauds to a level of management at least one level above the people involved. C) for finding all intentional misstatements concealed by collusion. D) for reporting all frauds to outside agencies or parties.
4) Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of illegal acts? A) The exchange of property for similar property in a nonmonetary transaction. B) The discovery of unexplained payments made to government employees. C) The presence of several difficult-to-audit transactions affecting expense accounts. D) The failure to develop adequate procedures that detect unauthorized purchases.
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5) Analytical procedures are most appropriate when testing which of the following types of transactions? A) Payroll and benefit liabilities. B) Acquisitions and disposals of fixed assets. C) Operating expense transactions. D) Long-term debt transactions.
6) An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: A) an error in recording amortization of the excess of the investor's cost over the investment's underlying book value. B) the investee's decision to reduce cash dividends declared per share of its common stock. C) an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities. D) a substantial fluctuation in the price of the investee's common stock on a national stock exchange.
7) Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion? A) Presumptive. B) Judgmental. C) Criticizing. D) Questioning.
8) Which of the following analytical procedures most likely would be used during the planning stage of an audit?
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A) Comparing current-year to prior-year sales volumes. B) Reading the financial statements and notes and considering the adequacy of evidence. C) Comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior-year's ratio. D) Reading the letter from the client's attorney and considering the threat of litigation.
9)
In auditing related party transactions, an auditor ordinarily places primary emphasis on: A) the probability that related party transactions will recur. B) confirming the existence of the related parties. C) verifying the valuation of the related party transactions. D) the adequacy of the disclosure of the related party transactions.
10)
Which of the following would not be considered an analytical procedure?
A) Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages. B) Developing the current year's expected net sales based on the sales trend of similar entities within the same industry. C) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. D) Estimating the current year's expected expenses based on the prior year's expenses and the current year's budget.
11) While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue?
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A) There is a broad indication of misappropriation of assets. B) There is an indication of theft of the entity's assets. C) There is an indication of embezzling receipts. D) There is a broad indication of financial reporting fraud.
12)
Inherent risk and control risk differ from detection risk in which of the following ways?
A) Inherent risk and control risk are calculated by the client. B) Inherent risk and control risk exist independently of the audit. C) Inherent risk and control risk are controlled by the auditor. D) Inherent risk and control risk exist as a result of the auditor's judgment about materiality.
13) While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate? A) Move detailed analytical procedures from year end to interim. B) Increase the dollar threshold of vouching customer invoices. C) Send negative accounts receivable confirmations instead of positive accounts receivable confirmations. D) Use more experienced audit team members to perform year-end testing.
14) If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles? A) Payroll. B) Revenue. C) Purchasing. D) Inventory.
15) According to auditing standards, external auditors' responsibilities for indirect noncompliance do not include: Version 1
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A) designing audit procedures to detect noncompliance in the absence of specific information brought to the auditors' attention. B) performing audit procedures when specific information indicates that possible noncompliance may have a material indirect effect on financial statements. C) considering the qualitative materiality of known and suspected noncompliance. D) obtaining written management representations concerning the absence of violations of laws and regulations.
16) Certain conditions and circumstances are often present when management fraud occurs. Which of the following is not such a condition or circumstance? A) Unfavorable industry conditions. B) Lack of working capital. C) High liquidity. D) Slow customer collections.
17) Independent auditors who consider fraud in the course of financial statement audits are well-advised to quantify "materiality" in terms of: A) the maximum amount of asset overstatement that might mislead investors in relation to the latest financial statements under audit. B) a maximum percentage of net income overstatement that might mislead investors in relation to the latest financial statements under audit. C) a cumulative amount of misstatement of assets or income over several years past and current that might mislead investors in relation to the latest financial statements under audit. D) controversial accounting measurements that might mislead investors in relation to the latest financial statements under audit.
18)
An auditor assesses the risk of material misstatement because it: A) is relevant to the auditor's understanding of the control environment. B) provides assurance that the auditor's overall materiality levels are appropriate. C) indicates to the auditor where inherent risk may be the greatest. D) affects the level of detection risk that the auditor may accept.
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19) When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely: A) perform extended audit procedures. B) consult with fraud examiners. C) report directly to the Securities and Exchange Commission within one day. D) withdraw from the engagement.
20)
Which of the following statements concerning noncompliance by clients is correct?
A) An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds. B) An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements. C) An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions. D) An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.
21) Which of the following statements best describes auditors' responsibility to detect errors and frauds? A) Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements. B) Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure. C) Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated. D) Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee.
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22) The probability that an audit team will give an inappropriate opinion on financial statements best describes: A) audit risk. B) inherent risk. C) control risk. D) detection risk.
23)
Inherent risk is the:
A) probability that some accounts are more susceptible to misstatement than others. B) probability that the client's internal control policies and procedures will fail to detect material misstatements. C) probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. D) probability that the auditor may not detect material misstatements in the financial statements.
24) If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct? A) Detection risk will decrease. B) Inherent risk will increase. C) Audit risk will decrease. D) Detection risk will increase.
25) If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense, A) income would be overstated. B) income would be understated. C) income would not be misstated. D) accounts receivable would be understated.
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26)
An audit team uses the assessed risk of material misstatement to:
A) evaluate the effectiveness of the entity's internal control policies and activities. B) identify transactions and account balances where inherent risk is at the maximum. C) indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D) determine the acceptable level of detection risk for financial statement assertions.
27)
The risk of material misstatement differs from detection risk in that it: A) arises from the misapplication of audit procedures. B) may be assessed in either quantitative or non-quantitative terms. C) exists independently of the financial statement audit. D) can be changed at the auditor's discretion.
28) The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is: A) audit risk. B) inherent risk. C) control risk. D) detection risk.
29) Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) decrease substantive testing. B) decrease detection risk. C) increase inherent risk. D) increase materiality levels.
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30)
The acceptable level of detection risk is inversely related to the: A) assurance provided by substantive tests. B) risk of misapplying audit procedures. C) preliminary judgment about materiality levels. D) risk of failing to discover material misstatements.
31) The existence of audit risk is recognized by the statement in the auditor's standard report that the: A) auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. B) financial statements are presented fairly, in all material respects, in conformity with applicable financial reporting framework. C) audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D) auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
32) When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the: A) liquidity of the account. B) degree of management estimation involved in determining the proper account balance. C) related internal control policies and procedures. D) complexity of calculations involved.
33) An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:
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A) the noncompliance is a violation of generally accepted accounting principles. B) the client does not take the remedial action that the auditor considers necessary. C) the illegal act was committed during a prior year that was not audited. D) the auditor has already assessed control risk at the maximum level.
34) When an auditor becomes aware of possible noncompliance by a client, the auditor should obtain an understanding of the nature of the act to: A) evaluate the effect on the financial statements. B) determine the reliability of management's representations. C) consider whether other similar acts may have occurred. D) recommend remedial actions to the audit committee.
35) Jones, CPA, is auditing the financial statements of XYZ Retailing Inc. What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements, and noncompliance that has a material, but indirect effect on the financial statements will be detected? A) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: None. B) Direct effect noncompliance: Reasonable; Indirect effect noncompliance: Reasonable. C) Direct effect noncompliance: Limited; Indirect effect noncompliance: None. D) Direct effect noncompliance: Limited; Indirect effect noncompliance: Reasonable.
36)
Generally accepted auditing standards states that analytical procedures:
A) should be applied in the planning and final review stages of the audit and as a substantive test during the audit. B) should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit. C) should be applied in the planning stage and can be applied as a substantive test and in the final review stage. D) should be applied in the final review stage, and can be applied as a substantive test and in the planning stage.
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37)
In the planning stage, analytical procedures are used to: A) identify potential problem areas. B) provide direct evidence about the balances in accounts. C) determine the mathematical correctness of the financial statements. D) perform all of these.
38) Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should: A) consider the matter a scope limitation. B) perform additional audit procedures to investigate the matter further. C) intensify the audit with the expectation of detecting management fraud. D) withdraw from the engagement.
39) For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent. A) As a substantive test: Yes; In the final review stage: Yes. B) As a substantive test: Yes; In the final review stage: No. C) As a substantive test: No; In the final review stage: Yes. D) As a substantive test: No; In the final review stage: No.
40) Which of the following would not likely be found in the minutes of the board of directors? A) Amount of dividends declared. B) Approval to pledge assets as security for debts. C) Authorization of officers' salaries. D) Approval of a new desktop computer for the controller.
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41) If an auditor encounters significant risks at the client, the auditor should do all of the following except: A) inform the SEC. B) perform extended procedures. C) include more experienced auditors on the engagement. D) perform tests closer to year end.
42)
Horizontal analysis refers to: A) the trend of income from year to year of persons suspected of fraud. B) changes of financial statement numbers and ratios across several years. C) financial statement amounts expressed each year as a proportion of a base amount. D) the change in a suspect's net worth from the beginning to the end of a period.
43)
Analytical procedures used in planning an audit should focus on: A) reducing the scope of tests of controls and substantive tests. B) providing assurance that potential material misstatements will be identified. C) enhancing the auditor's understanding of the client's business. D) assessing the adequacy of the available evidential matter.
44)
Sources of financial and nonfinancial data do not include: A) financial account information for comparable prior periods. B) nonfinancial information such as physical production statistics. C) company budgets and forecasts. D) Bureau of Labor statistics.
45) The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as:
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A) horizontal analysis. B) vertical analysis. C) net worth analysis. D) expenditure analysis.
46) Which of the following accounts tends to be most predictable for purposes of analytical procedures? A) Accounts receivable. B) Travel and entertainment expense. C) Interest expense. D) Income taxes payable.
47) Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The primary purpose of analytical procedures conducted during the planning stages is to: A) identify the appropriate schedules to be prepared by the client. B) identify the types of errors or frauds that can occur in transactions. C) identify unusual conditions that deserve additional audit effort. D) determine the existence of unrecorded liabilities or overstated assets.
48) Which of the following is not required by AU-C 240, "Consideration of Fraud in a Financial Statement Audit"? A) Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit. B) Conduct a discussion by the audit team of the risks of material misstatement due to fraud. C) Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until verified by the auditor. D) Conduct inquiries of shareholders as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.
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49) When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the: A) extent of substantive tests of details. B) level of inherent risk. C) extent of tests of controls. D) level of detection risk.
50) What assurance does the auditor provide that errors, frauds, and direct effect noncompliance that are material to the financial statements will be detected? A) Errors: Limited; Frauds: Negative; Direct effect noncompliance: Limited. B) Errors: Limited; Frauds: Limited; Direct effect noncompliance: Reasonable. C) Errors: Reasonable; Frauds: Limited; Direct effect noncompliance: Limited. D) Errors: Reasonable; Frauds: Reasonable; Direct effect noncompliance: Reasonable.
51)
Experience has shown that the many large fraudulent transactions can be found in: A) systematic processing of large volumes of day-to-day ordinary transactions. B) payroll fraudsters' mistakes in using unissued Social Security numbers. C) petty cash embezzlements. D) non-routine, nonsystematic journal entries.
52) Inherent risk and control risk differ from detection risk in that inherent risk and control risk are: A) elements of audit risk whereas detection risk is not. B) changed at the auditor's discretion whereas detection risk is not. C) considered at the individual account-balance level whereas detection risk is not. D) functions of the client and its environment whereas detection risk is not.
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53) The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the: A) nature of substantive tests to more effective procedures. B) timing of substantive tests, such as performing them at year-end rather than at an interim date. C) extent of substantive tests, such as using larger sample sizes. D) assurances provided by substantive tests to a lower level.
54) Which of the following is not an acceptable response to fraud risks related to sales that were identified in an audit? A) Exercise professional skepticism when performing sales testing. B) Increase the assessment of control risk for sales. C) Increase the assessment of detection risk for sales. D) Perform additional substantive sales procedures on a surprise basis.
55) If tests of controls induce the auditor to change the assessed level of control risk for Property Plant & Equipment from 50% to 100%, and audit risk (6%) and inherent risk remain constant, the acceptable level of detection risk: A) would most likely change from 10% to 5%. B) would most likely change from 20% to 40%. C) would most likely change from 30% to 15%. D) would be unchanged, because the auditor has control over detection risk. E) cannot be determined because inherent risk is not given.
56)
Managing business risk is the responsibility of: A) the auditors. B) management. C) the SEC. D) the PCAOB.
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57)
Auditors would use the enterprise risk model: A) to reduce the client's business risk. B) to determine detection risk. C) to evaluate management's risk assessment. D) to monitor client risk.
58)
Auditors use brainstorming: A) to heighten the audit team's awareness of fraud potential. B) to heighten management's awareness of fraud potential. C) to determine detection risk. D) to set materiality.
59)
The purpose of an audit strategy is: A) to provide a defense against litigation. B) to gain an understanding of the client. C) to comply with securities law. D) to set the scope, timing, and direction for auditing each relevant assertion.
ESSAY. Write your answer in the space provided or on a separate sheet of paper. 60) What are the independent auditor's responsibilities to detect and report errors and frauds?
61) Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.
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62) Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements may be materially misstated due to the existence of fraud. Required: 1. (a) Describe Post's responsibilities on the circumstances described above. 2. (b) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post is precluded from applying necessary procedures in searching for frauds. 3. (c) Describe Post's responsibilities for reporting on General's financial statements and other communications if Post concludes that General's financial statements are materially affected by frauds.
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63) Items 1 through 6 represent an auditor's observed changes in certain financial statement ratios or amounts from the prior year's ratios or amounts. For each observed change, select the most likely explanation or explanations from the list of explanations provided. Answers on the list may be selected once, more than once, or not at all. Auditor's observed changes (considered independent of each other). 1.Inventory turnover increased substantially from the prior year. (Select 3 explanations) 2.Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations) 3.Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year. (Select 3 explanations) 4.Long term debt increased from the prior year, but interest expense increased a larger than proportionate amount than long term debt. (Select 1 explanation) 5.Operating income increased from the prior year although the entity was less profitable than in the prior year. (Select 2 explanations) 6.Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. (Select 1 explanation)
64) Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by auditors. Required: a.Describe the broad purposes of analytical procedures. b.Identify the sources of information from which an auditor develops expectations.
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