Auditing A Risk Based Approach to Conducting a Quality Audit 10Th Edition By Johnstone – Test Bank

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Auditing A Risk Based Approach to Conducting a Quality Audit 10Th Edition By Johnstone – Test Bank

Chapter_6_A_Framework_for_Audit_Evidence

 

1. Audit evidence used to support an audit opinion is obtained soley from audit procedures.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-01 – LO: 06-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Obtaining Sufficient Appropriate Audit Evidence

 

2. The amount of evidence gathered is not important to an auditor since the quality of the evidence is of primary importance.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.100 – Identify the Basic Sources of Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

3. The auditor uses professional judgment to determine which audit procedures to perform.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.100 – Identify the Basic Sources of Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

4. Audit evidence consists of both information that corroborates management’s assertions and information that contradicts such assertions.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-01 – LO: 06-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Obtaining Sufficient Appropriate Audit Evidence

 

5. The reliability of audit evidence relates to the connection between the audit procedure being performed and the assertion being audited.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-02 – LO: 06-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Appropriateness of Audit Evidence

 

6. The type of audit evidence known as inquiry does not ordinarily provide sufficient audit evidence of the absence of a material misstatement, nor is it alone sufficient to test the operating effectiveness of controls.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

7. A limitation of observation is that observing a process on one day does not necessarily indicate how the transactions were processed on a different day or over a relevant period of time.

a. True
b. False

 

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

 

8. Relevance and reliability of evidence make up the appropriateness of audit evidence.

a. True
b. False

 

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

 

9. Evidence can be directly or indirectly relevant to an assertion.

a. True
b. False

 

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

 

10. Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak.

a. True
b. False

 

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

 

11. Internal documentation is generally less reliable than external documentation.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-02 – LO: 06-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Appropriateness of Audit Evidence

 

12. Confirmation statements from banks are an example of third-party external documents.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-02 – LO: 06-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Appropriateness of Audit Evidence

 

13. Inspection of tangible assets generally provides reliable evidence with the respect to the completeness of the assets, but not necessarily about the existence of the assets.

a. True
b. False

 

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

 

14. Vouching recorded transactions involves taking a sample entry from a journal and obtaining the original source documents to ensure the transaction occurred.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-02 – LO: 06-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Appropriateness of Audit Evidence

 

15. Tracing is a process that helps establish that recorded transactions are valid.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-02 – LO: 06-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Obtaining Appropriate Audit Evidence

 

16. One strategy used by auditors in testing assertions is to perform directional testing to find overstatements or understatements.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.103 – Explain Directional Testing
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

17. The direction of testing from recorded amounts toward supporting documentation provides evidence as to existence of assets and revenues.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.103 – Explain Directional Testing
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

18. The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.103 – Explain Directional Testing
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

19. For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.103 – Explain Directional Testing
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

20. Ulanda and Mudana, CPAs are performing an audit on McArnee, Inc. Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger. The purpose of this test is to determine the possibility of understated liabilities.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.103 – Explain Directional Testing
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

21. The auditor’s concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.103 – Explain Directional Testing
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

22. While inspecting documents, auditors should use original documents rather than copies, because copies are easy for management to falsify.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

23. Auditors should mail third party confirmations through the client’s mailroom.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

24. Inspection of an asset generally provides reliable evidence about the rights and obligations assertion related to that asset.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-03 – LO: 06-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Type and Timing of Audit Procedures

 

25. Audit documentation serves as support for the financial statements.

a. True
b. False

 

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

 

26. The greatest risk of recording transactions in the incorrect period occurs during the roll-forward period.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests

 

27. The primary importance of the audit program is its guidance of the overall conduct of the audit.

a. True
b. False

 

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

 

28. Inquiries of client personnel are not a frequent means of evidence gathering by an auditor.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

29. The purpose of performing analytical procedures in the planning stage of an audit is to gather audit evidence and make conclusions about account balances.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-03 – LO: 06-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Type and Timing of Audit Procedures

 

30. An example of physical observation is the auditor’s testing of inventory by counting it to substantiate the existence assertion.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

31. The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recalculation by footing.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

32. Some audit procedures may be performed prior to the end of the year under audit.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

33. The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures.

a. True
b. False

 

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

 

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

a. True
b. False

 

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

 

35. In a reasonableness test, the auditor develops an expected value of an account by using data wholly or partly independent of the client’s accounting information system.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

36. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed.

a. True
b. False

 

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

 

37. An outside specialist may assist the auditor in obtaining sufficient, appropriate evidence concerning the analysis of complex tax compliance issues.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-07 – LO: 06-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Using a Specialist to Assist with Obtaining Evidence

 

38. Audit documentation should generally be retained for at least seven years.

a. True
b. False

 

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

 

39. Audit documentation should include the initials or electronic signature in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work.

a. True
b. False

 

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

 

40. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

41. The client’s verbal evidence is more reliable than evidence from independent outside sources.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

42. Underlying accounting records consist of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

43. The relevance of audit evidence depends on the audit assertion being tested.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

44. Analytical procedures are a type of substantive evidence.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

45. While inspecting documents, the reliability depends on the nature and source of the documentation.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

46. The auditor’s job is to gather sufficient appropriate audit evidence on which to base an opinion.

a. True
b. False

 

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

 

47. Appropriateness deals with the quantity of evidence the auditor collects, whereas sufficiency deals with the quality of evidence the auditor collects.

a. True
b. False

 

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

 

48. Audit findings represent a summary of incorrect transactions detected during the audit.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.06-09 – LO: 06-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Documenting Audti Evidence

 

49. Liabilities and expenses are most often tested for overstatements.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.101 – Audit Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

50. Which one of the following statements is false?

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

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.rview – Overview
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

51. Appropriateness of evidence is a measure of which of the following?

a. Quantity of evidence.
b. Quality of evidence.
c. Sufficiency of evidence.
d. Meaning of evidence.

 

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

 

52. Two determinants of the persuasiveness of evidence include which of the following?

a. Competence and Sufficiency.
b. Relevance and Reliability.
c. Appropriateness and Sufficiency.
d. Independence and Effectiveness.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.102 – Appropriateness and Sufficiency of Evidence

 

53. Directional testing involves testing transactions or balances primarily for which type of error?

a. Overstatement.
b. Understatement.
c. Either overstatement or understatement.
d. Either overstatement nor understatement.

 

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

 

54. Which one of the following would be considered the most reliable type of audit evidence?

a. Purchase orders from vendors.
b. Customer accounts receivable files.
c. Computerized general ledger.
d. Confirmations from banks.

 

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

 

55. Which one of the following would be the most reliable type of evidence?

a. Photocopies.
b. Indirectly obtained evidence.
c. Observation of assets.
d. Inquiry with the in-house attorney.

 

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

 

56. Which one of the following would be the least reliable type of evidence?

a. Confirmations returned by bank directly to the auditor.
b. Letters of communication from the Securities Exchange Commission.
c. Physical examination of perpetual inventory.
d. Evidence from an easily overridden information system.

 

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

 

57. An example of an external document would include which of the following?

a. Vendor invoices.
b. Customer orders.
c. Confirmation replies from customers.
d. All the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.108 – External Document

 

58. Which of the following is an example of inspection of documentation?

a. Review shipping documents.
b. Estimate the expected amount of interest income.
c. Observe controls.
d. Recalculate the total amount include on a sales invoice.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests

 

59. The process of vouching helps establish which of the following regarding recorded transactions?

a. Transactions have been recorded.
b. Transactions are complete.
c. Transactions are valid.
d. Transactions are presented properly.

 

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

 

60. Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence?

a. Reprocessing.
b. Recalculation.
c. Vouching.
d. Examination of documentation.

 

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

 

61. Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests which of the following assertions?

a. Occurrence.
b. Rights.
c. Existence.
d. Completeness.

 

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

 

62. Sufficient evidence gathered by the auditor involves which of the following?

a. The quantity of evidence to be obtained.
b. The type of evidence to be obtained.
c. Obtaining limited evidence to achieve efficiency.
d. The use of an audit program to obtain evidence.

 

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

 

63. An audit program provides an effective means for which of the following?

a. Reviewing the completeness and persuasiveness of procedures performed.
b. Recording the audit work performed and those responsible for performing the work.
c. Organizing and distributing the work.
d. All the above.

 

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

 

64. The reliability of a client’s internal documentation is most affected by which of the following?

a. The auditor’s independence.
b. Management’s motivation to misstate accounts.
c. The type of audit report that will be issued.
d. Management’s ability to understand generally accepted audit standards.

 

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

 

65. External documentation may lack reliability. Which of the following is the most probable reason for that?

a. The external party may be competent in performing duties.
b. The documentation may be properly understood by the client in the response.
c. The auditor may decide not to use the documentation and replace it with other documents.
d. The documentation may have been altered if the process is not controlled from inception.

 

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

 

66. When may audit procedures be performed?
I – on the balance sheet date.
II – prior to the balance sheet date.
III – subsequent to the balance sheet date.

a. I only.
b. I and III only.
c. II only.
d. I, II, and III.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

67. An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following?

a. Directional testing for existence.
b. Directional testing for completeness.
c. Direct testing for valuation.
d. Direct testing for rights.

 

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

 

68. Directional testing is important to an auditor because of which of the following factors?

a. Certain accounts are more prone to be misstated by overstatement than others.
b. The auditor must remain organized when conducting an audit.
c. The primary concern of the auditor is the understatement of asset and revenue accounts.
d. It tests for existence and completeness simultaneously.

 

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

 

69. Which of the following assertions is the primary assertion that is satisfied by physically observing the client’s count of inventory?

a. Rights.
b. Valuation.
c. Completeness.
d. Existence.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.109 – Basic Audit Procedures and the Assertion(s) each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

70. When the auditor used the audit procedure vouching she is primarily concerned with which of the following assertions?

a. Completeness.
b. Existence.
c. Authorization.
d. Classification.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.109 – Basic Audit Procedures and the Assertion(s) each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

71. Observation suffers from which of the following limitations?

a. Observation of processing is rarely unobtrusive.
b. Observation of processing on one day does not necessarily indicate how transactions were processed on a different day.
c. All the above.
d. None of the above.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.109 – Basic Audit Procedures and the Assertion(s) each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

72. The extent of procedures is affected mostly by which of the following factors?

a. The sheer volume of procedures to be applied by the auditor.
b. The time of year in which the client takes a physical inventory in the warehouse.
c. The auditor’s judgment that misstatements are probable in certain balances.
d. The availability of the client’s staff at or near the balance sheet date.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.109 – Basic Audit Procedures and the Assertion(s) each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

73. An audit program is created to specify which of the following?

a. The type of audit opinion to be rendered based upon procedures performed.
b. The audit procedures that will be performed every year for the client.
c. How an auditor should think while performing audit procedures.
d. Audit objectives and procedures to be followed during the audit process.

 

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

 

74. Which one of the following is the primary reason for documenting audit work?

a. To prevent litigation by other parties that question the audit performance.
b. To provide a stand-alone medium that gives audit conclusions and supports the opinion.
c. To give the client a full reporting of all work performed on their behalf.
d. To supply a point of reference for all auditors performing the work subsequently.

 

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

 

75. To be considered reliable evidence, confirmations must be controlled by which of the following individuals?

a. A client employee responsible for accounts receivable.
b. An external auditor.
c. A client’s internal audit department.
d. A client’s controller or CFO.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

76. Conclusions are typically documented by auditors in which type of work paper?

a. Audit planning memo.
b. Audit program.
c. Audit memoranda.
d. Representation letter.

 

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

 

77. Which of the following is an example of poorly-developed audit documentation?

a. Clear communication as to how testing was performed, the results and conclusions.
b. Organization and assembly of documentation in an orderly fashion.
c. Headings that include the name and signature of the client representative that the auditor interacted with while performing testing.
d. Authenticated identification of the person responsible for completing the procedure and conclusions.

 

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

 

78. The processes used by management in developing estimates include which of the following?

a. Controls over the process.
b. The reliability of underlying data in developing the estimate.
c. Use of outside experts by management (for example, how they were used and their expertise).
d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.110 – Uniqueness of Procedures for Testing Management’s Estimates
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

79. Which of the following is the primary source for evidence to corroborate the existence of pending litigation?

a. Vendor confirmations.
b. Disclosures in financial statements.
c. Management representation letters.
d. Attorney confirmations.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

80. Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to do which of the following?

a. Decrease.
b. Increase.
c. Remain the same.
d. Become more difficult to ascertain.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

81. What is determined to be appropriate and sufficient will be affected by which of the following?

a. The client’s risk of material misstatement.
b. The risk of material weakness in internal controls.
c. Either a or b.
d. None of the above.

 

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

 

82. Audit documentation should contain which of the following?

a. A heading that includes the name of the audit client, an explanatory title, and the balance sheet date.
b. The initials or electronic signature of the auditor performing the audit test and the date the test was completed.
c. The initials or electronic signature of the manager or partner who reviewed the documentation and the date the review was completed.
d. All of the above.

 

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

 

83. Which of the following is not an estimate that requires significant auditor judgment and skepticism?

a. Obligations for pension plans.
b. Valuation of goodwill.
c. Allowance for bad debt.
d. Common stock and related additional paid-in capital.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.110 – Uniqueness of Procedures for Testing Management’s Estimates
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

84. Which of the following is not a type of internal documentation?

a. Legal documents.
b. Business documents.
c. Third-party documents.
d. Accounting documents.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.109 – Basic Audit Procedures and the Assertion(s) each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

85. Which of the following is a factor that the auditor should consider as they affect the reliability and relevance of information produced by a management’s specialist?

a. Competence, capabilities, and objectivity of that specialist.
b. Work performed by that specialist.
c. Appropriateness of that specialist’s work as audit evidence for the relevant assertion.
d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

86. When using confirmations with outside parties, the auditor must assure which of the following about the outside party?

a. The outside party exists.
b. The outside party is able to respond objectively and independently.
c. The outside party is unbiased in responding.
d. All the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

87. Each of the audit procedures that an auditor could select possesses which of the following characteristics?:

a. Audit procedures take time, effort, and money.
b. Audit procedures are difficult to perform.
c. Audit procedures require multiple people from the firm to perform.
d. All of the above.

 

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

 

88. Which of the following types of audit evidence is the most reliable?

a. Evidence from the client’s organization.
b. Evidence from a poorly controlled system.
c. Directly observable evidence.
d. Facsimiles of documents.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.113 – Persuasiveness of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

89. Which of the following types of audit evidence is the least reliable?

a. Evidence from the client’s organization.
b. Evidence derived from a well-controlled system.
c. Evidence from independent outside sources.
d. Original documents.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.113 – Persuasiveness of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

90. In evaluating cost of evidence, which of the following evidence qualities of the audit usually has the lowest cost?

a. High quality.
b. Medium quality.
c. Low quality.
d. All cost the same.

 

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

 

91. Recalculations of the client’s computations would not include which of the following types of evidence?

a. Cutoff.
b. Footing.
c. Extension.
d. Cross-footing.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.114 – Types of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

92. Vouching of transactions deals with which of the following?

a. Testing forward.
b. Testing backward.
c. Testing at a point in time.
d. Directional testing either forward or backward.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.114 – Types of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

93. Reprocessing of transactions involves which of the following?

a. Testing forward.
b. Testing backward.
c. Testing at a point in time.
d. Directional testing either forward or backward.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.114 – Types of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

94. Which of the following characteristics are not normally included in good audit documentation?

a. Initials of the person preparing and reviewing the document.
b. An assessment of whether the test indicates the possibility of material misstatement in an account.
c. A cross-reference.
d. All are included in good audit documentation.

 

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

 

95. A date at which audit evidence is collected earlier than the balance sheet date is referred to as what?

a. Subsequent date.
b. Cutoff period.
c. Significant date.
d. Interim date.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

96. The auditor normally considers both underlying accounting data and corroborating information in the audit process. Underlying accounting data does not include which of the following items?

a. Evidence of controls.
b. Minutes of meetings.
c. Checks, invoices, and contracts.
d. General and subsidiary ledger.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.114 – Types of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

97. The written record that forms the basis for the auditor’s conclusions is referred to as what?

a. Audit documentation.
b. Audit adjustment.
c. Accounting records.
d. Footing.

 

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

 

98. Why is the appropriateness of audit evidence obtained by the auditor important in forming an audit opinion? Describe the qualities information should have to be considered appropriate by the auditor.

ANSWER:   Appropriateness is a measure of the quality of evidence. Audit evidence that is considered appropriate contains the characteristics of relevance and reliability. Relevant evidence refers to the assertion being tested. Reliability refers to the relative truthfulness of the assertion.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.102 – Appropriateness and Sufficiency of Evidence
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

99. Directional testing

Explain the meaning of “directional testing” and identify the reasons why directional testing leads to audit efficiency. Give examples of directional testing for the existence and completeness assertions.

ANSWER:   Directional testing involves testing transactions or balances primarily for one type of error, either overstatement or understatement, but not for both at the same time. For example, an audit test for an understatement of Accounts Payable also tests for an understatement of Purchases. Directional testing also leads to audit efficiency for the following reasons:

Misstatements of some accounts are more likely to occur in one direction than the other.
Directional testing of an account balance provides evidence on a complementary set of accounts.
Specific assertions are normally tested directionally. An example is the testing of the existence assertion for overstatements or the completeness assertions for understatements.

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

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

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

 

100. Proper audit documentation

Audit documentation serves as the primary support of an audit. Give at least six examples of the components of proper working paper documentation.

ANSWER:   Audit documentation serves as the primary evidence in support of the auditor’s opinion. Well prepared documentation should include:

a heading that includes the name of the audit client, an explanatory title, and the balance sheet date.
the initials or electronic signature of the auditor performing the audit test and the date the test was completed.
the initials or electronic signature of the senior, manager, or partner who reviewed the working papers and the date the review was completed.
a description of the nature of the test performed and the findings.
an assessment of whether the test indicates the possibility of material misstatement in the account.
manual or electronic tick marks and a legend indicating the nature of the work performed by the auditor.
A section that identifies all significant issues that arose during the audit and how they were resolved
a cross reference or electronic link to related working papers.

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

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

 

101. Reliability of audit evidence

The Auditing Standards Board established guidelines to assist auditors in evaluating the reliability of audit evidence. Discuss the criteria for the more reliable types of evidence and include an example for each.

ANSWER:   Evidence that is considered to be more reliable includes:

Directly observable evidence such as counting inventory or observing fixed assets.
Evidence derived from a client’s strong internal control structure such as reconciliations or the information system itself.
Evidence from independent external sources such as confirmations from banks, customers and attorneys.

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

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

 

102. Sufficient appropriate evidential matter

Discuss the importance of the phrase “sufficient appropriate evidence is to be obtained…”
How do auditing standards define sufficiency and appropriateness?

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

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

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

 

103. Audit assertions and procedures on Cash balances

Identify and demonstrate the audit assertions and different approaches to the obtaining audit evidence for an audit of cash balances in a financial statement audit.

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

Observe the client’s handling of the petty cash fund and the control over incoming cash and cash storage. Observe the process of cash received in the mailroom, deposits to the bank and reconciliation by a separate individual.
Physically count the petty cash, cash in drawers and cash in safes.
Examine documents such as the bank statement.
Make inquiries of personnel concerning the handling of daily deposits or the mail receipts.
Confirm the bank balance with financial institutions using proper confirmation procedures.
Recalculate the bank reconciliation computation trace the book balance to the general ledger.
Inquire of materially aged outstanding checks and deposits in transit.
Trace outstanding checks and deposits in transit clearing subsequent bank statements from a qualified source.
Vouch material and unusual entries in the cash account.
Perform an analysis of bank transfers at or near cutoff.
Use analytical procedures to determine the reasonableness of the reported cash balance.

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

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

104. Distinguish between internal documentation and external documentation as types of audit evidence. Give two examples of each. Which type is considered more reliable?

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

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

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.104 – Audit Procedures and the Assertion(s) Each Tests
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

105. Audit program

Discuss the purpose of the audit program and its importance to the auditor.

ANSWER:   An audit program specifies the actual procedures to be performed in gathering the required audit evidence about the assertions embodied in the client’s financial statements. Because the audit program guides the overall conduct of the audit it is the single most important piece of documentation in an audit engagement. The program is an effective means for:

organizing and distributing audit work.
monitoring the audit process and progress.
reviewing for possible omission of material areas from the audit.
recording the audit work performed.
reviewing the completeness and persuasiveness of procedures performed.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.106 – Nature and Purposes of Audit Programs
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

106. Audit standards of proper documentation

Discuss the audit standards that must be applied to the auditor’s documentation. Give five examples the types of documentation will be found in the audit work papers.

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

Pursuant to all of these requirements, audit work papers will include such items as:

1. Evidence of planning such as the planning memo, risk assessments and the audit program.
2. Evidence of the auditor’s understanding and assessment of internal control over the client organization.
3. The client’s trial balance and proposed audit adjustments.
4. Copies of certain internal and external documents such as letters of communication with the client and returned confirmations.
5. Audit memoranda documenting the testing process, auditor reasoning and conclusions.
6. Results of analytical procedures and audit testing.
7. Auditor generated analysis of account balances such as the allowance for doubtful accounts.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.105 – Purposes and Contents of Audit Programs
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

107. Audit procedures

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

Procedure How used Assertion(s) tested
Observation
Physical examination
Inquiry
Confirmation
Examination of documents
Recomputation
Reprocessing
Vouching
Analytical
Procedures

 

ANSWER:  
Procedure How used Assertion(s) tested
Observation Observe taking of inventory of assets Existence
Physical examination Inspect existence and condition of assets. Existence, Valuation
Inquiry Inquire of management of assets not recorded or that have been sold or discarded. Existence, Completeness
Confirmation Confirm details of purchase with seller of asset. Existence, Valuation, Presentation and Disclosure, Rights
Examination of documents Examine supporting documentation. Existence, Valuation, Rights
Recomputation Recompute depreciation Valuation
Reprocessing Reprocess a sample of purchase transactions Existence
Vouching Vouching a sample of recorded assets Existence, Valuation, Rights
Analytical Analysis depreciation Valuation, Completeness
Procedures expense
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.115 – Audit procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

108. Audit procedures

Businesses often have litigation against them that the auditor has to identify and adequately disclose. List the financial assertions that apply to Contingencies. For each assertion indicate two or three audit procedures that would address that assertion.Organize you answer as follows:

Financial statement assertion Audit procedure(s)

 

ANSWER:  
Financial statement assertion Audit procedure(s)
Existence Inquiry of management
Send confirmation request to legal counsel
Completeness Inquiry of management
Vouch legal expenses
Review nature of legal services to determine if a liability might exist
Rights and Obligations Inquiry of management
Confirmation from legal counsel
Examine payments related to in-progress litigation
Valuation and Allocation Inquiry of management
Confirmation of legal counsel
Review court rulings
Presentation and Disclosure Inquiry of management
Confirmation of legal counsel
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.115 – Audit procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

Chapter_7_Planning_the_Audit_Identifying_and_Responding_to_the_Risks_of_Material_Misstatement

 

1. Materiality relates to the significance or importance of an item.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

2. Auditors and management should agree on what is considered material.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

3. Clearly trivial and not material are terms that can be used interchangeably.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

4. Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it cannot be revised.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

5. As detection risk increases, the amount of evidence an auditor needs to obtain decreases.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

6. When business risk is low, the auditor does not have a high concern about the ability of the organization to operate efficiently.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

7. Only public companies have to be concerned with business risk.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

8. Touring a company’s plant offers much insight into potential audit issues.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

9. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain information related to client management’s integrity.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

10. News media and web searches can provide useful information related to client management’s integrity and the risk of material misstatement in the financial statements.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

11. LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

12. The purpose of the auditor‘s consideration of the effectiveness of internal controls is to determine the nature, extent and timing of substantive testing.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

13. Trend analysis deals with the relationship between two or more accounts within the current-year.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

14. One potential limitation to using industry data in preliminary analytical procedures is that the data from the client may not be directly comparable to the data of the industry.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

15. Brainstorming sessions should be led by the engagement team.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

16. During the process of a brainstorming session, the focus is more on the quality of ideas generated rather than the quantity of ideas generated.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-05 – LO: 07-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Analytical Procedures and Brainstorming Activities

 

17. The usual length of a brainstorming session is about four hours.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

18. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures not detecting a material misstatement.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

19. Detection risk is measured on a scale of 0% to 5%.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

20. A risk of material misstatement of 100% indicates that material misstatement is highly likely.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

21. The internal controls of an organization have no impact on the efficiency of an audit.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-06 – LO: 07-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Planning Audit Procedures to Respond to Assessed Risks of Material Misstatement

 

22. Ineffective internal controls result in higher risk of material misstatement in the financial statements than effective internal controls.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

23. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess inherent risk at a higher level.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-03 – LO: 07-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Factors Affecting Inherent Risk

 

24. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

25. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-06 – LO: 07-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Responding to Identified Risks of Material Misstatement

 

26. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

27. Audit procedures have to be announced or be completed at predictable times.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

28. All audit procedures must be completed before year end.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

29. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures and requires more evidence.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

30. Inherent and control risks are risk controlled by the auditor.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

31. A risk factor indicating a heightened risk of fraud would be considered a significant risk.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

32. The existence of one or more risk factors means that there is a material misstatement present.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

33. In most audits, materiality is most commonly expressed as a percentage of net income.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-01 – LO: 07-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Materiality

 

34. Auditors are only concerned with materiality for the financial statements as a whole.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

35. Tolerable misstatement is always less than or equal to performance materiality.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

36. An immaterial misstatement is defined as one that is clearly inconsequential, whether taken individually or in the aggregate and whether judged by any criteria of circumstance.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-01 – LO: 07-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Materiality

 

37. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

38. Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

39. The lower the dollar amount of the performance materiality the more audit evidence is required.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

40. A significant risk is the same as a material risk.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

41. If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

42. The purpose of tests of controls are to provide reasonable assurance that internal controls are operating effectively.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

43. The quick ratio is useful for analyzing inventory accounts.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

44. Detection risk is controllable by the client.

a. True
b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

45. Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

a. True
b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

46. Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2?

a. “amount of a misstatement or omission”
b. “in light of surrounding circumstances”
c. “probable that the judgement of a reasonable person”
d. “significantly altered the total mix of information available”

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-01 – LO: 07-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Materiality

 

47. If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet, the auditor should set overall materiality at which of the following dollar amounts?

a. $20,000
b. $25,000
c. $40,000
d. $15,000

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

48. Which of the following best describes the amount of misstatement an auditor is willing to accept and still judge that an account balance is not materially misstated?

a. Tolerable misstatement.
b. Performance materiality.
c. A clearly trivial amount.
d. Significant risk.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

49. If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial material setting?

a. They need to be reassessed.
b. They need to be noted in the footnotes.
c. No action is required.
d. None of the above.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

50. Which item is correct concerning the risk of material misstatement?

a. Risk of material misstatement arises because audit procedures have been misapplied.
b. Risk of material misstatement can be controlled and changed by the auditor.
c. Risk of material misstatement must be assessed in non-quantitative terms.
d. Risk of material misstatement is controllable by the client.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

51. What is the nature of the relationship between risk of material misstatement and audit risk?

a. Direct.
b. None.
c. Correlational.
d. Inverse.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

52. Detection risk is affected by which aspects of substantive audit procedures?

a. Nature.
b. Timing.
c. Extent.
d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

53. Which of the following factors would lead an auditor to assess inherent risk at a higher level?

a. The account balance is easily determined without estimation.
b. The account balance is composed of a high volume of nonroutine transactions.
c. The account balance is composed of simple transactions.
d. All of the above would lead the auditor to assess a higher level of inherent risk.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-03 – LO: 07-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assess Factors Affecting Inherent Risk

 

54. To learn more about a company and its inherent risks, auditors can use which of the following resources?

a. Management inquiries.
b. Economic statistics.
c. Online searches.
d. Any of the above could be used.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

55. Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor?

a. Data is under court order.
b. They must always respond.
c. The client does not approve of confidential information being shared.
d. Both A and C are correct.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

56. Which of the following factors will result in control risk being assessed at a higher level?

a. Controls are well designed.
b. There is a lack of supervision of accounting personnel.
c. Accounting staff are well trained and educated.
d. The control environment is operating effectively.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

57. Which of the following are two frequently used preliminary analytical procedures?

a. Reasonableness tests and economic analyses.
b. Trend analyses and reasonableness tests.
c. Ratio analyses and economic analyses.
d. Ratio analyses and trend analyses.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

58. Which of the following best describes year-to-year comparisons of account balances?

a. Time analyses.
b. Reasonableness tests.
c. Ratio analyses.
d. Trend analyses.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

59. Which of the following ratios provide information about liquidity?

a. Net profit margin.
b. Current ratio.
c. Inventory turnover.
d. Sales to assets.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

60. Which of the following would be a reason that industry and client data were not directly comparable?

a. Broad industry.
b. Use of different accounting principles.
c. Neither of the above.
d. Both A & B are correct.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

61. Which of the following are common brainstorming session guidelines?

a. Freedom of expression.
b. Respectful communication.
c. Suspension of criticism.
d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

62. What is the main reason to establish guidelines for brainstorming sessions?

a. To not hurt feelings.
b. It is required by the SEC.
c. To encourage interactive and constructive group dialogue and idea exchange.
d. To pass information up to top-level management efficiently.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

63. What type of relationship exists between audit risk and detection risk?

a. Direct.
b. Inverse.
c. Indirect.
d. No relationship.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

64. What is the typical range for the setting of audit risk?

a. 1% – 10%
b. 1% – 5%
c. 0% – 5%
d. 0% – 10%

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

65. Which of the following would be the likely risk results from using a 1% level of detection risk?

a. High detection risk and low audit risk.
b. High detection risk and high audit risk.
c. Low detection risk and high audit risk.
d. Low detection risk and low audit risk.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

66. What is the typical range for the assessment of the risk of material misstatement?

a. 0% – 100%
b. 0% – 10%
c. 0% – 5%
d. 1% – 100%

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

67. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?

a. Increases.
b. Decreases.
c. Stays the same.
d. Becomes less reliable.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

68. Which of the following statements best describes what is meant by setting control risk at100%?

a. Controls are effective.
b. Controls are relevant.
c. Controls are ineffective.
d. Cannot be determined from the information given.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

69. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of direct testing performed by the auditor?

a. Increase in direct testing.
b. Decrease in direct testing
c. No change in direct testing.
d. Direct testing is not needed.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

70. Which of the following terms best describes the numerical depiction of the relationship between control risk, inherent risk, detection risk, and audit risk?

a. Audit risk model.
b. Risk of misstatement model.
c. Significance model.
d. Materiality equation.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

71. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective, which of the following tests are eliminated?

a. Substantive testing.
b. Tests of controls.
c. Tests of details of balances.
d. Substantive analytical procedures.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

72. Which of the following terms best describes the types and appropriateness of audit procedures used?

a. Nature of detection risk.
b. Material misstatement risk.
c. Nature of auditing procedures.
d. Nature of risk response.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

73. Appropriateness addresses which aspect of audit procedures?

a. Relevance.
b. Reasoning.
c. Reliability.
d. Both A & C.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

74. Which of the following best describes what is meant by the timing of risk response?

a. Where procedures are conducted.
b. When procedures are conducted.
c. How procedures are conducted.
d. Who conducts the procedures.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

75. What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?

a. Introduce unpredictability.
b. Confuse the client.
c. Gather information during different times of the year.
d. Finish the audit sooner.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

76. Which of the following approaches can be used to introduce unpredictability into the audit?

a. Assessing high risk accounts.
b. Performing procedures on an unannounced basis.
c. Performing the audit in the same location each year.
d. Selecting items that would normally be tested.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

77. What procedure has to be completed at or after the end of the period?

a. Assessment of control risk.
b. Engagement letter.
c. Evaluation of adjusting journal entries.
d. All procedures must be completed prior to period end.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

78. An increase in the risk of material misstatement would lead to which of the following responses?

a. Increase in the extent of auditing procedures.
b. Decrease in the extent of auditing procedures.
c. No change in the extent of auditing procedures.
d. No change in the extent of audit procedures.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

79. Which of the following risk factors suggests a heightened level of risk of material misstatement?

a. Having a stable product.
b. The departure of key personnel of a company.
c. Few immaterial related-party transactions.
d. Declining a merger with another company.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

80. Which of the following terms best describes the risk that audit procedures will fail to detect misstatements exceeding tolerable misstatement?

a. Audit risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-02 – LO: 07-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Identifying and Assessing Risks of Material Misstatement

 

81. As the risk of material misstatement increases, what happens with detection risk?

a. Medium increase.
b. Stay the same.
c. Decrease.
d. Severely increase.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

82. In which of the following situations will auditors typically rely on internal controls over financial reporting?

a. If control risk is assessed at a high level.
b. If the controls are determined to be designed and operating effectively.
c. If the clients asks the auditor to test controls.
d. If the controls are sufficient to increase control risk to an acceptable level.

 

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

 

83. The risk of material misstatement refers to which of the following?

a. Inherent risk.
b. Control risk and acceptable audit risk.
c. The combination of inherent risk and control risk.
d. Inherent risk and audit risk.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.117 – Risks of Material Misstatement
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

84. Which of the following statements is false?

a. Inherent risk is inversely related to the level of control risk.
b. Inherent risk is directly related to the amount of evidence required in account testing.
c. Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no internal controls.
d. Inherent risk and control risk are assessed by the auditor and controlled by the client.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-03 – LO: 07-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Factors Affecting Inherent Risk

 

85. Which of the following is a factor that would cause an increase in the assessment of control risk?

a. New products have uncertain likelihood of success
b. Little interaction between senior management and operating staff
c. A new business strategy is improperly implemented.
d. The industry is mature and declining.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.07-04 – LO: 07-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Factors Affecting Control Risk

 

86. Qualitative reasons for materiality

List the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative reasons.

ANSWER:   The SEC provides guidance when a quantitatively small misstatement may still be considered material due to qualitative reasons. These reasons include:

∙ The misstatement hides a failure to meet analysts’ consensus expectations for the company.

∙ The misstatement changes a loss into income, or vice versa.

∙ The misstatement concerns a segment or other portion of the company’s business that plays a significant role in the company’s operations or profitability.

∙ The misstatement affects the company’s compliance with regulatory requirements.

∙ The misstatement affects the company’s compliance with loan covenants or other contractual requirements.

∙ The misstatement has the effect of increasing management’s compensation.

∙ The misstatement involves the concealment of an unlawful transaction.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

87. Inherent risk

List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level.

ANSWER:   Factors that would lead an auditor to assess inherent risk relating to operations at a higher level include:

∙ The company lacks personnel or expertise to deal with the changes in the industry.

∙ New products and service offerings have uncertain likelihood of successful introduction and acceptance by the market.

∙ The use of information technology is incompatible across systems and processes.

∙ Expansion of the business for which the demand for the company’s products or services has not been accurately estimated.

∙ A new business strategy is incompletely or improperly implemented.

∙ Financing is lost due to the company’s inability to meet financing requirements.

∙ New regulatory requirements increase legal exposure.

∙ Alternative products, services, competitors, or providers pose a threat to current business.

∙ There are significant supply chain risks.

∙ The production and delivery processes are complex.

∙ The industry is mature and declining.

∙ The organization lacks ability to control costs with the possibility of unforeseen costs.

∙ The organization produces products that have multiple substitutes.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

88. Brainstorming

What are the steps of the brainstorming process?

ANSWER:   The steps of the brainstorming process are:

1. Review prior year client information.

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

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

4. Identify audit responses to fraud risks.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

89. Risk Responses

When considering risk responses, what steps should the auditor take?

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

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

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

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

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

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

90. Importance of materiality judgments

Explain the differences between performance materiality and tolerable misstatement.

ANSWER:   Performance materiality refers to the amount or amounts set by the auditor at less than the materiality level for the financial statements as a whole or for particular classes of transactions, account balances, or disclosures. If the auditor plans the audit only to detect individual material misstatements, the auditor would be overlooking the fact that the aggregate of individually immaterial misstatements can cause the financial statements as a whole to be materially misstated. Performance materiality is used for assessing the risks of material misstatement and determining the nature, timing, and extent of audit procedures to perform during the audit opinion formulation process. If performance materiality is set too high, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. If performance materiality is set too low, the auditor might perform more substantive procedures than necessary. Performance materiality is different from, but relates to, the concept of tolerable misstatement.

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

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.116 – Material Misstatement and Importance of Materiality Judgments
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

91. Relationships between risks

Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will affect planned audit evidence.

Audit risk,

∙ Inherent risk,
∙ Control risk,
∙ Detection risk,
∙ Tolerable misstatement

ANSWER:   An increase in audit risk decreases planned evidence.

An increase in inherent risk increases planned evidence.

An increase in control risk increases planned evidence.

An increase in detection risk decreases planned evidence.

An increase in tolerable misstatement decreases planned evidence.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.122 – Respond to the Assessed Risks of Material Misstatement and Plan Audit Procedures
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

92. Predecessor auditor

Discuss the required communications between predecessor and successor auditors.

ANSWER:   Auditing standards require a successor auditor to communicate with the predecessor auditor whenever accepting a client that has been previously audited. The purpose of the communication is to help the successor auditor evaluate whether to accept the engagement. While the initiation of communication rests with the successor auditor, the predecessor auditor must respond to the request for information. However, because of the requirements that related to confidentiality, the predecessor must obtain the former client’s permission prior to providing information.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking