AUDITING AND ASSURANCE SERVICES AN INTEGRATED APPROACH 16TH EDITION – TEST BANK

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AUDITING AND ASSURANCE SERVICES AN INTEGRATED APPROACH 16TH EDITION – TEST BANK

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 6   Audit Responsibilities and Objectives

 

6.1   Learning Objective 6-1

 

1) The objective of an audit of the financial statements is an expression of an opinion on

  1. A) the fairness of the financial statements in all material respects.
  2. B) the accuracy of the financial statements.
  3. C) the accuracy of the annual report.
  4. D) the accuracy of the balance sheet and income statement.

Answer:  A

Terms:  Objective of ordinary audit of financial statements

Diff:  Easy

Objective:  LO 6-1

AACSB:  Reflective thinking

 

2) If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor

  1. A) should withdraw from the engagement.
  2. B) should request an increase in audit fees so that more resources can be used to conduct the audit.
  3. C) has the responsibility of notifying financial statement users through the auditor’s report.
  4. D) should notify regulators of the circumstances.

Answer:  C

Terms:  Auditor believes that financial statements are nor fairly presented

Diff:  Easy

Objective:  LO 6-1

AACSB:  Reflective thinking

 

3) Auditors accumulate evidence to

  1. A) defend themselves in the event of a lawsuit.
  2. B) determine if the financial statements are correct.
  3. C) satisfy the requirements of the Securities Acts of 1933 and 1934.
  4. D) reach a conclusion about the fairness of the financial statements.

Answer:  D

Terms:  Auditors accumulate evidence

Diff:  Easy

Objective:  LO 6-1

AACSB:  Reflective thinking

 

 

4) Which of the following is not one of the steps used to develop audit objectives?

  1. A) know the proper type of audit opinion to issue
  2. B) divide the financial statements into cycles
  3. C) know the management assertions about the financial statements
  4. D) know the specific audit objectives for classes of transactions

Answer:  A

Terms:  Steps the AICPA and accounting profession taking to reduce practitioner’s exposure to lawsuits

Diff:  Easy

Objective:  LO 6-1

AACSB:  Reflective thinking

5) When developing the audit objectives, the first step is to divide the financial statements into cycles.

Answer:  FALSE

Terms:  Steps to develop audit objectives

Diff:  Easy

Objective:  LO 6-1

AACSB:  Reflective thinking

 

6.2   Learning Objective 6-2

 

1) The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the

  1. A) board of directors.
  2. B) company management.
  3. C) financial statement auditor.
  4. D) company’s internal audit department.

Answer:  B

Terms:  Responsibility for adopting sound accounting policies and maintaining adequate internal controls

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

 

 

2) If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or

  1. A)
Issue an adverse opinion Issue a qualified opinion
Yes Yes

 

  1. B)
Issue an adverse opinion Issue a qualified opinion
No No

 

  1. C)
Issue an adverse opinion Issue a qualified opinion
Yes No

 

  1. D)
Issue an adverse opinion Issue a qualified opinion
No Yes

 

Answer:  A

Terms:  Auditor insists on financial statement disclosures that management finds unacceptable

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

3) In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of

  1. A) GAAP.
  2. B) the Sarbanes-Oxley Act.
  3. C) the Securities Exchange Act of 1934.
  4. D) GAAS.

Answer:  C

Terms:  Certifying annual financial statements by CEO and CFO

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

Topic:  Public

 

 

4) Which of the following statements is true of a public company’s financial statements?

  1. A) Sarbanes-Oxley requires only the CEO to certify the financial statements.
  2. B) Sarbanes-Oxley requires only the CFO to certify the financial statements.
  3. C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.
  4. D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.

Answer:  C

Terms:  Public company’s financial statements

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

Topic:  SOX

 

5) The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to

  1. A) the auditor.
  2. B) management.
  3. C) both management and the auditor equally.
  4. D) management for the statements and the auditor for the notes.

Answer:  B

Terms:  Responsibility for preparation of the financial statements and the accompanying footnotes

Diff:  Moderate

Objective:  LO 6-2

AACSB:  Reflective thinking

 

6) Because they operate the business on a daily basis, a company’s management knows more about the company’s transactions and related assets, liabilities, and equity than the auditors.

Answer:  TRUE

Terms:  Responsibility for fair presentation of financial statements

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

 

7) The annual reports of many public companies include a statement about management’s responsibilities and relationship with the CPA firm.

Answer:  TRUE

Terms:  Management’s responsibility and relationship with CPA firm

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

8) The auditors determine which disclosures must be presented in the financial statements.

Answer:  FALSE

Terms:  Responsibility for fair presentation of financial statements

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

 

9) The Sarbanes-Oxley Act provides for criminal penalties.

Answer:  TRUE

Terms:  Sarbanes-Oxley Act

Diff:  Easy

Objective:  LO 6-2

AACSB:  Reflective thinking

Topic:  SOX

 

6.3   Learning Objective 6-3

 

1) The auditor’s best defense when material misstatements are not uncovered is to have conducted the audit

  1. A) in accordance with generally accepted auditing standards.
  2. B) as effectively as reasonably possible.
  3. C) in a timely manner.
  4. D) only after an adequate investigation of the management team.

Answer:  A

Terms:  Auditors’ best defense when material misstatements are not uncovered

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

2) Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?

  1. A) The auditor commonly examines a sample, rather than the entire population of transactions.
  2. B) Accounting presentations contain complex estimates which involve uncertainty.
  3. C) Fraudulently prepared financial statements are often difficult to detect.
  4. D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

Answer:  D

Terms:  Reasons auditors provide only reasonable assurance on financial statements

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

3) Which of the following statements is the most correct regarding errors and fraud?

  1. A) An error is unintentional, whereas fraud is intentional.
  2. B) Frauds occur more often than errors in financial statements.
  3. C) Errors are always fraud and frauds are always errors.
  4. D) Auditors have more responsibility for finding fraud than errors.

Answer:  A

Terms:  Errors and fraud

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

4) When an auditor believes that an illegal act may have occurred, the auditor should first

  1. A) obtain an understanding of the nature and circumstances of the act.
  2. B) consult with legal counsel or others knowledgeable about the illegal act.
  3. C) discuss the matter with the audit committee.
  4. D) withdraw from the engagement.

Answer:  A

Terms:  Auditor believes an illegal act may have occurred

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

5) The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected.

  1. A) important to the financial statements
  2. B) statistically significant to the financial statements
  3. C) material to the financial statements
  4. D) identified by the client

Answer:  C

Terms:  Auditor has no responsibility to plan and perform audit to obtain reasonable assurance

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

6) Fraudulent financial reporting is most likely to be committed by whom?

  1. A) line employees of the company
  2. B) outside members of the company’s board of directors
  3. C) company management
  4. D) the company’s auditors

Answer:  C

Terms:  Fraudulent financial reporting

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

7) Which of the following would most likely be deemed a direct effect illegal act?

  1. A) violation of federal employment laws
  2. B) violation of federal environmental regulations
  3. C) violation of federal income tax laws
  4. D) violation of civil rights laws

Answer:  C

Terms:  Direct-effect illegal act

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

8) The concept of reasonable assurance indicates that the auditor is

  1. A) not a guarantor of the correctness of the financial statements.
  2. B) not responsible for the fairness of the financial statements.
  3. C) responsible only for issuing an opinion on the financial statements.
  4. D) responsible for finding all misstatements.

Answer:  A

Terms:  Concept of reasonable assurance

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

9) Which of the following is the auditor least likely to do when aware of an illegal act?

  1. A) discuss the matter with the client’s legal counsel
  2. B) obtain evidence about the potential effect of the illegal act on the financial statements
  3. C) contact the local law enforcement officials regarding potential criminal wrongdoing
  4. D) consider the impact of the illegal act on the relationship with the company’s management

Answer:  C

Terms:  Illegal acts

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

10) An auditor discovers that the company’s bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of

  1. A) employee fraud.
  2. B) an error.
  3. C) misappropriation of assets.
  4. D) a defalcation.

Answer:  B

Terms:  Errors and fraud

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

11) An auditor has a duty to

  1. A) provide reasonable assurance that material misstatements will be detected.
  2. B) be a guarantor of the fairness in the statements.
  3. C) be equally responsible with management for the preparation of the financial statements.
  4. D) be an insurer of the fairness in the statements.

Answer:  A

Terms:  Auditor responsibility for notifying users as to whether statements are properly stated

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

12) If the auditor were responsible for making certain that all of management’s assertions in the financial statements were absolutely correct,

  1. A) bankruptcies could no longer occur.
  2. B) bankruptcies would be reduced to a very small number.
  3. C) audits would be much easier to complete.
  4. D) audits would not be economically practical.

Answer:  D

Terms:  Auditor responsible for making certain that all of management’s assertions were absolutely correct

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

13) When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor

  1. A) should inquire of management about whether the entity is in compliance with such laws and regulations.
  2. B) has no responsibility to determine if any violations of these laws has occurred.
  3. C) must report all violations, including inconsequential violations, to the audit committee.
  4. D) should perform the same procedures as for violations having a direct effect on the financial statements.

Answer:  A

Terms:  Indirect-effect illegal acts

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

14) Which of the following statements is usually true?

  1. A) Materiality is easy to quantify.
  2. B) Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion among management.
  3. C) Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement.
  4. D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

Answer:  D

Terms:  Materiality

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

15) Auditing standards make ________ distinction(s) between the auditor’s responsibilities for searching for errors and fraud.

  1. A) little
  2. B) a significant
  3. C) no
  4. D) various

Answer:  C

Terms:  Auditor responsibility for searching for errors and fraud

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

16) In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is

  1. A) greater for management fraud because managers are inherently more deceptive than employees.
  2. B) greater for management fraud because of management’s ability to override existing internal controls.
  3. C) greater for employee fraud because of the higher crime rate among blue collar workers.
  4. D) greater for employee fraud because of the larger number of employees in the organization.

Answer:  B

Terms:  Management fraud vs. employee fraud and auditor failure to detect both

Diff:  Challenging

Objective:  LO 6-3

AACSB:  Reflective thinking

 

17) Misappropriation of assets

  1. A) is generally committed by company management.
  2. B) harms the users of the financial statements by providing them incorrect financial data for their decision making.
  3. C) causes harm to stockholders because the assets are no longer available to their rightful owners.
  4. D) causes the financial statements to be misstated since the misappropriation usually involves material amounts.

Answer:  C

Terms:  Misappropriation of assets

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

18) When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility

  1. A) more on discovering errors than employee fraud.
  2. B) more on discovering employee fraud than errors.
  3. C) equally on discovering errors and employee fraud.
  4. D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.

Answer:  C

Terms:  Fraud and errors

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

19) If there is collusion among management, the chance a normal audit would uncover such acts is

  1. A) very low.
  2. B) very high.
  3. C) zero.
  4. D) none of the above.

Answer:  A

Terms:  Employees collude to falsify documents

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

20) When the auditor becomes aware of or suspects noncompliance with laws and regulations

  1. A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit.
  2. B) the auditor should discuss the matter with management at a level above those suspected of the noncompliance.
  3. C) the auditor should obtain additional information to evaluate the possible effects on the financial statements.
  4. D) all of the above

Answer:  D

Terms:  Audit procedures when noncompliance is identified or suspected

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

21) When the auditor identifies or suspects noncompliance with laws and regulations, the auditor

  1. A) should discuss the matter with those whom they believe committed the illegal act.
  2. B) begin communication with the FASB in accordance with PCAOB regulations.
  3. C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.
  4. D) should withdraw from the engagement.

Answer:  C

Terms:  Noncompliance with laws and regulations

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

22) When an auditor knows that an illegal act has occurred, she must

  1. A) report it to the proper governmental authorities.
  2. B) consider the effects on the financial statements, including the adequacy of disclosure.
  3. C) withdraw from the engagement.
  4. D) issue an adverse opinion.

Answer:  B

Terms:  Auditor knows illegal act occurred

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

Topic:  Public

 

23) Which of the following is an accurate statement concerning the auditor’s responsibility to consider laws and regulations?

  1. A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements.
  2. B) The auditor’s responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.
  3. C) It is the responsibility of the auditor to determine if an act constitutes noncompliance.
  4. D) The auditor must inform an outside party if management has knowingly not complied with a law or regulation.

Answer:  B

Terms:  Illegal acts, effect on financial statements

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

24) Which of the following statements best describes the auditor’s responsibility with respect to illegal acts that do not have a material effect on the client’s financial statements?

  1. A) Generally, the auditor is under no obligation to notify parties other than personnel within the client’s organization.
  2. B) Generally, the auditor is under an obligation to inform the PCAOB.
  3. C) Generally, the auditor is obligated to disclose the relevant facts in the auditor’s report.
  4. D) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

Answer:  A

Terms:  Auditor responsibility with respect to illegal acts

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

25) Which of the following statements best describes the auditor’s responsibility regarding the detection of fraud?

  1. A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.
  2. B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.
  3. C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets.
  4. D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

Answer:  B

Terms:  Auditor responsibility regarding detection of fraud

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

26) When reporting identified or suspected noncompliance,

  1. A) the auditor must report inconsequential noncompliance to the audit committee.
  2. B) the auditor should communicate all material noncompliance matters to those charged with governance.
  3. C) any intentional noncompliance must be reported to local law enforcement.
  4. D) all noncompliance, whether material or not, must result in a disclaimer of opinion.

Answer:  B

Terms:  Reporting of identified or suspected noncompliance

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

27) Another term for misappropriation of assets is

  1. A) management fraud.
  2. B) collusion.
  3. C) employee fraud.
  4. D) illegal acts.

Answer:  C

Terms:  Misappropriation of assets

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

28) The provisions of many laws and regulations affect the financial statements

  1. A) directly.
  2. B) only indirectly.
  3. C) both directly and indirectly.
  4. D) materially if direct; immaterially if indirect.

Answer:  B

Terms:  Illegal acts, effect on financial statements

Diff:  Challenging

Objective:  LO 6-3

AACSB:  Reflective thinking

 

29) If a client has violated federal tax laws,

  1. A) the auditor must notify the IRS.
  2. B) and the amount is significant, the auditor should communicate with those charged with governance.
  3. C) the noncompliance generally will not impact the financial statements.
  4. D) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.

Answer:  B

Terms:  Illegal acts, effect on financial statements

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

30) Discuss the differences between errors, frauds, and illegal acts. Give an example of each.

Answer:  The primary difference between errors and frauds is that errors are unintentional misstatements of the financial statements, whereas frauds are intentional misstatements. Illegal acts are violations of laws or government regulations, other than frauds. An example of an error is a mathematical mistake when footing the columns in the sales journal. An example of a fraud is the creation of fictitious accounts receivable. An example of an illegal act is the dumping of toxic waste in violation of the federal environmental protection laws.

Terms:  Errors, frauds, and illegal acts

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

31) Discuss the actions an auditor should take when an illegal act is identified or suspected.

Answer:  When an auditor discovers or suspects noncompliance with a law or regulation (illegal act), unless the matters involved are inconsequential, the auditor should:

 

  1. Obtain an understanding of the nature and circumstances of the act. Additional information should be obtained to evaluate the possible effects on the financial statements. The auditor should discuss the matter with management at a level above those involved with the suspected noncompliance, and, when appropriate, those charged with governance. If the auditor is precluded by management or those charged with governance from obtaining sufficient appropriate evidence to provide sufficient information that supports that the entity is in compliance with the laws and regulations, and the auditor believes the effect of the noncompliance may be material to the financial statements, the auditor should consider the need to obtain legal advice. The auditor should also evaluate the effects of the noncompliance on other aspects of the audit.

 

  1. Communicate with those charged with governance matters involving noncompliance with laws and regulations that came to the auditor’s attention during the course of the audit. If the matter is believed to be intentional and material, it should be communicated to those charged with governance, such as the board of directors, as soon as practicable.

 

  1. Identify whether a responsibility exists to report the identified or suspected noncompliance to parties outside the entity, such as regulatory authorities.

 

  1. If the noncompliance has a material effect and has not been adequately reflected in the financial statements, the auditor should express a qualified or adverse opinion. If the auditor has been precluded by management from obtaining sufficient appropriate evidence to determine if the noncompliance is material, the auditor should express a qualified opinion or disclaim an opinion.

Terms:  Actions auditor should take when auditor discovers illegal act

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

32) Discuss three reasons why auditors are responsible for “reasonable” but not “absolute” assurance.

Answer:

  • Most audit evidence results from testing a sample of a population. Sampling involves some risk of not uncovering material misstatements.
  • Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events. As a result, the auditor has to rely on evidence that is persuasive but not convincing.
  • Fraudulently prepared financial statements are often very difficult for the auditor to detect, especially when there is collusion among management.

Terms:  Reasons auditors are responsible for reasonable but not absolute assurance

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

33) Discuss the differences in the auditor’s responsibilities for discovering (1) material errors, (2) material fraud (3) illegal acts having a direct effect on the financial statements, and (4) illegal acts that do not have a direct effect on the financial statements.

Answer:  Auditing standards make no distinction between the auditor’s responsibilities for searching for errors and fraud. In either case, the auditor must obtain reasonable assurance about whether the statements are free of material misstatements. The standards also recognize that fraud is often more difficult to detect because management or the employees perpetrating the fraud attempt to conceal the fraud. Still, the difficulty of detection does not change the auditor’s responsibility to properly plan and perform the audit to detect material misstatements, whether caused by error or fraud.

 

The auditor’s responsibility for uncovering illegal acts that have a direct effect on the financial statements is the same as for errors and fraud. However, the auditor is not required to search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they exist.

Terms:  Auditor responsibilities for discovering material errors, material fraud, direct-effect illegal acts, and indirect-effect illegal acts

Diff:  Challenging

Objective:  LO 6-3

AACSB:  Reflective thinking

 

34) Errors are usually more difficult for an auditor to detect than frauds.

Answer:  FALSE

Terms:  Auditor detection of errors and frauds

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

35) Other than inquiring of management about policies they have established to prevent illegal acts and whether management knows of any laws or regulations that the company has violated, the auditor should not search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they may exist.

Answer:  TRUE

Terms:  Auditor responsibility for searching for illegal acts that do not have a direct effect on the financial statements

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

36) When an auditor believes that an illegal act may have occurred, the first step he or she should take is to gather additional evidence to determine the extent of the illegality and if there is a direct impact on the financial statements.

Answer:  TRUE

Terms:  Auditor believes an illegal act may have occurred

Diff:  Easy

Objective:  LO 6-3

AACSB:  Reflective thinking

37) Audits are expected to provide a higher degree of assurance for the detection of material frauds than is provided for an equally material error.

Answer:  FALSE

Terms:  Degree of assurance for detection of material frauds and errors

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

38) Auditors have a higher degree of responsibility for detecting illegal acts that have a direct effect on the financial statements than illegal acts that do not have a direct effect on the financial statements.

Answer:  TRUE

Terms:  Auditor degree of responsibility for detecting illegal acts

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

39) The auditor’s first course of action when an illegal act is uncovered should be to immediately notify the appropriate authorities, including but not limited to, law enforcement and the Securities and Exchange Commission.

Answer:  FALSE

Terms:  Illegal act uncovered

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

40) An audit generally provides no assurance that illegal acts that do not have a direct effect on the financial statements will be detected.

Answer:  TRUE

Terms:  Indirect-effect illegal acts; No assurance

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

41) Auditing standards indicate that reasonable assurance is a moderate, but not absolute, level of assurance that the financial statements are free of material misstatement.

Answer:  FALSE

Terms:  Moderate or high risk of management fraud

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

42) In obtaining reasonable assurance that the financial statements are free of material misstatement, the auditor does not need to take into account the applicable legal and regulatory framework relevant to the client.

Answer:  FALSE

Terms:  Auditor’s responsibility for year-end inventory procedures

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

43) The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company’s financial position and results of operations.

Answer:  FALSE

Terms:  Objective of audit of financial statements

Diff:  Challenging

Objective:  LO 6-3

AACSB:  Reflective thinking

 

44) As the impact from noncompliance is further removed from affecting the financial statements, the less likely the auditor is to become aware of or recognize noncompliance when auditing the financial statements.

Answer:  TRUE

Terms:  Auditor responsibility for searching for illegal acts that do not have a direct effect on the financial statements

Diff:  Moderate

Objective:  LO 6-3

AACSB:  Reflective thinking

 

 

6.4   Learning Objective 6-4

 

1) An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and

  1. A) the assumption that upper-level management is dishonest.
  2. B) a critical assessment of the audit evidence.
  3. C) the assumption that all employees are motivated by greed.
  4. D) verification of all critical information by independent third parties.

Answer:  B

Terms:  Attitude of professional skepticism

Diff:  Easy

Objective:  LO 6-4

AACSB:  Reflective thinking

 

2) Which of the following is an accurate statement about professional skepticism?

  1. A) Professional skepticism involves a critical assessment of the evidence.
  2. B) Professional skepticism is easy to implement in practice.
  3. C) It is easy for auditors to understand that their clients may try to deceive them throughout the audit process.
  4. D) Professional skepticism is only necessary for the audits of public companies.

Answer:  A

Terms:  Professional skepticism

Diff:  Easy

Objective:  LO 6-4

AACSB:  Reflective thinking

3) One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others.

  1. A) interpersonal understanding
  2. B) autonomy
  3. C) suspension of judgment
  4. D) self-esteem

Answer:  B

Terms:  Characteristics of professional skepticism

Diff:  Moderate

Objective:  LO 6-4

AACSB:  Reflective thinking

 

 

4) A questioning mindset

  1. A) means the auditor must prove every statement that management makes to them.
  2. B) means the auditor should approach the audit with a “do not trust anyone” mental outlook.
  3. C) assures that the auditor will only accept honest clients.
  4. D) means the auditor should approach the audit with a “trust but verify” mental outlook.

Answer:  D

Terms:  Professional skepticism

Diff:  Moderate

Objective:  LO 6-4

AACSB:  Reflective thinking

 

5) One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious.

  1. A) self-esteem
  2. B) an interpersonal understanding
  3. C) a search for knowledge
  4. D) a questioning mindset

Answer:  C

Terms:  Professional skepticism

Diff:  Moderate

Objective:  LO 6-4

AACSB:  Reflective thinking

 

6) ________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions.

  1. A) Self-esteem
  2. B) Interpersonal understanding
  3. C) Suspension of judgment
  4. D) Autonomy

Answer:  A

Terms:  Professional skepticism

Diff:  Moderate

Objective:  LO 6-4

AACSB:  Reflective thinking

7) An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should

  1. A) plan and perform the engagement with an attitude of professional skepticism.
  2. B) not rely on internal controls that are designed to prevent or detect errors or fraud.
  3. C) design audit tests to detect unrecorded transactions.
  4. D) extend the work to audit the majority of the recorded transactions and records of an entity.

Answer:  A

Terms:  Professional skepticism when auditing a client

Diff:  Moderate

Objective:  LO 6-4

AACSB:  Reflective thinking

 

8) Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism. List and briefly describe each of these characteristics.

Answer:  The six characteristics of skepticism are:

  1. Questioning mindset — a disposition to inquiry with some sense of doubt
  2. Suspension of judgment — withholding judgment until appropriate evidence is obtained
  3. Search for knowledge — a desire to investigate beyond the obvious, with a desire to corroborate
  4. Interpersonal understanding — recognition that people’s motivations and perceptions can lead them to provide biased or misleading information
  5. Autonomy — the self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others
  6. Self-esteem — the self-confidence to resist persuasion and to challenge assumptions or conclusions.

Terms:  Professional skepticism

Diff:  Moderate

Objective:  LO 6-4

AACSB:  Reflective thinking

 

9) Auditors often convince themselves that they only accept clients they can trust and who have high integrity.

Answer:  TRUE

Terms:  Professional skepticism

Diff:  Easy

Objective:  LO 6-4

AACSB:  Reflective thinking

 

10) A suspension of judgment is the recognition that people’s motivations and perceptions can lead them to provide biased or misleading information.

Answer:  FALSE

Terms:  Professional skepticism; interpersonal understanding; suspension of judgment

Diff:  Easy

Objective:  LO 6-4

AACSB:  Reflective thinking

6.5   Learning Objective 6-5

 

1) The starting point to effective professional judgment begins with

  1. A) gathering the facts.
  2. B) identifying alternatives.
  3. C) identifying relevant literature.
  4. D) identifying and defining the issue.

Answer:  D

Terms:  Professional judgment process

Diff:  Easy

Objective:  LO 6-5

AACSB:  Reflective thinking

 

2) Which of the following is not a step in the professional judgment process?

  1. A) make the decision
  2. B) perform the analysis
  3. C) determine the type of audit opinion
  4. D) review and document the rationale for the conclusion

Answer:  C

Terms:  Professional judgment process

Diff:  Moderate

Objective:  LO 6-5

AACSB:  Reflective thinking

 

3) ________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value.

  1. A) Anchoring
  2. B) Availability
  3. C) Overconfidence
  4. D) Confirmation

Answer:  A

Terms:  Common judgment tendencies

Diff:  Moderate

Objective:  LO 6-5

AACSB:  Reflective thinking

 

4) When the auditor considers whether he understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he is performing which step in the professional judgment process?

  1. A) identifying and defining the issue
  2. B) performing the analysis and identifying potential alternatives
  3. C) making the decision
  4. D) gathering the facts

Answer:  B

Terms:  Professional judgment process

Diff:  Moderate

Objective:  LO 6-5

AACSB:  Reflective thinking

5) When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will

  1. A) consider the accounting and auditing standards relevant to the issues.
  2. B) articulate in written form the rationale of their judgment.
  3. C) identify the issue.
  4. D) gather the facts.

Answer:  B

Terms:  Professional judgment process

Diff:  Easy

Objective:  LO 6-5

AACSB:  Reflective thinking

 

6) Auditors should be alert for potential judgment tendencies, traps, and biases that may impact their decision making process. Identify and define four of these judgment tendencies. Then, for each judgment tendency, suggest a way to avoid or mitigate the tendency.

Answer:  The judgment tendencies and strategies to avoid or mitigate the tendencies are:

  1. Confirmation: the tendency to put more weight on information that is consistent with initial beliefs or preferences
  2. Overconfidence: the tendency to overestimate one’s own abilities to perform tasks or to make accurate assessments of risks or other judgments and decisions
  3. Anchoring: the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from the initial value
  4. Availability: the tendency to consider information that is easily retrievable or what’s easily accessible as being more likely or more relevant

 

Strategy to avoid or mitigate the tendency:

  1. Confirmation: Make the opposing case and consider alternative explanations. Consider potentially disconfirming or conflicting information
  2. Overconfidence: Challenge opinions and experts. Challenge underlying assumptions.
  3. Anchoring: Solicit input from others. Consider management bias, including the potential for fraud or material misstatement.
  4. Availability: Consider why something comes to mind. Obtain and consider objective data. Consult with others and take the opposing case.

Terms:  Professional judgment; strategies to mitigate common judgment tendencies

Diff:  Challenging

Objective:  LO 6-5

AACSB:  Reflective thinking

 

7) The profession has developed professional judgment frameworks that illustrate an effective decision-making process.

Answer:  TRUE

Terms:  Professional judgment process

Diff:  Easy

Objective:  LO 6-5

AACSB:  Reflective thinking

8) During the professional judgment process, the analysis may identify only one appropriate response to the issue.

Answer:  FALSE

Terms:  Professional judgment process

Diff:  Moderate

Objective:  LO 6-5

AACSB:  Reflective thinking

 

 

9) Overconfidence is the tendency to put more weight on information that is consistent with the initial beliefs or preferences.

Answer:  FALSE

Terms:  Professional judgment process

Diff:  Moderate

Objective:  LO 6-5

AACSB:  Reflective thinking

 

10) In order to mitigate availability, the auditor should consult with others and make the opposing case.

Answer:  TRUE

Terms:  Professional judgment; strategies to mitigate common judgment tendencies

Diff:  Moderate

Objective:  LO 6-5

AACSB:  Reflective thinking

 

6.6   Learning Objective 6-6

 

1) Why does the auditor divide the financial statements into smaller segments?

  1. A) Using the cycle approach makes the audit more manageable.
  2. B) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces.
  3. C) The cycle approach is used because auditing standards require it.
  4. D) All of the above are correct.

Answer:  A

Terms:  Reason auditor divides financial statements into smaller segments

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

2) Why does the auditor divide the financial statements into segments around the financial statement cycles?

  1. A) Most auditors are trained to audit cycles as opposed to entire financial statements.
  2. B) The approach aids in the assignment of tasks to different members of the audit team.
  3. C) The cycle approach is required by auditing standards.
  4. D) The cycle approach allows the auditor to detect illegal acts.

Answer:  B

Terms:  Reason auditor divides financial statements into smaller segments

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

3) The most important general ledger account included in and affecting several cycles is the

  1. A) cash account.
  2. B) inventory account.
  3. C) income tax expense and liability accounts.
  4. D) retained earnings account.

Answer:  A

Terms:  Account included in and affected several cycles

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

4) When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that

  1. A) the transactions are related to financing a company rather than to its operations.
  2. B) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively.
  3. C) Both A and B are correct.
  4. D) Neither A nor B is correct.

Answer:  C

Terms:  Cycle approach to segmenting an audit

Diff:  Challenging

Objective:  LO 6-6

AACSB:  Reflective thinking

 

5) In describing the cycle approach to segmenting an audit, which of the following statements is not true?

  1. A) All general ledger accounts and journals are included at least once.
  2. B) Some journals and general ledger accounts are included in more than one cycle.
  3. C) The “capital acquisition and repayment” cycle is closely related to the “acquisition of goods and services and payment” cycle.
  4. D) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

Answer:  D

Terms:  Cycle approach to segmenting an audit

Diff:  Challenging

Objective:  LO 6-6

AACSB:  Reflective thinking

 

 

6) The cycle approach to auditing

  1. A) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.
  2. B) cannot combine transactions recorded in different journals with the general ledger balances that result from those transactions.
  3. C) is the only way of segmenting an audit.
  4. D) assumes that each account has two or more cycles associated with it.

Answer:  A

Terms:  Cycle approach to segmenting an audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

7) Which balance sheet accounts are included in the payroll and personnel cycle?

  1. A) cash in bank, accrued payroll, trade accounts receivable
  2. B) accrued payroll, notes payable, and deferred tax
  3. C) accrued payroll, cash in bank, and accrued payroll taxes
  4. D) salaries and commissions, cash in bank, accrued payroll taxes

Answer:  C

Terms:  Cycle approach to segmenting an audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

8) Auditors generally use a financial statement cycle approach when performing a financial statement audit. Describe the transaction flow, using specific examples, from journals to financial statements that produce financial statements.

Answer:  Transactions–sales, cash receipts, acquisition of goods/services, cash disbursements, payroll services and disbursements, and allocation and adjustments

 

Journals–sales, cash receipts, acquisitions, cash disbursements, payroll, and general

 

General ledger and subsidiary ledgers to General ledger trial balance to financial statements

Terms:  Financial statement cycle approach when performing a financial statement audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

 

9) Listed below are several accounts listed from a company’s trial balance. Next to each account put the letter corresponding to the transaction cycle used to audit the account.

S = Sales and collection cycle             I = Inventory and warehousing cycle

A = Acquisition and payment cycle   C = Capital acquisition and repayment cycle

P = Payroll and personnel cycle

 

  1. ________ Sales returns and allowances 5. ________ Salaries and commissions
  2. ________ Capital stock 6. ________ Cost of goods sold
  3. ________ Buildings 7. ________ Trade accounts receivable
  4. ________ Notes payable 8. ________ Rent

Answer:  1. S, 2. C, 3. A, 4. C, 5. P, 6. I, 7. S, 8. A

Terms:  Financial statement cycle approach when performing a financial statement audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

10) Under the cycle approach to segmenting an audit, transactions recorded in different journals should never be combined with the general ledger balances that result from those transactions.

Answer:  FALSE

Terms:  Cycle approach to segmenting an audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

11) Under the cycle approach, the only accounts that have two or more cycles associated with them are cash and accounts receivable.

Answer:  FALSE

Terms:  Cycle approach to segmenting an audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

12) Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.

Answer:  TRUE

Terms:  Cycle approach to segmenting an audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

13) When examining the relationships of the five cycles and general cash, the cycles have no beginning or end except at the origin or final disposition of the company.

Answer:  TRUE

Terms:  Cycle approach to segmenting an audit

Diff:  Moderate

Objective:  LO 6-6

AACSB:  Reflective thinking

 

6.7   Learning Objective 6-7

 

1) Auditors have found that generally the most efficient and effective way to conduct audits is to

  1. A) obtain complete assurance about the correctness of each class of transactions affecting the account.
  2. B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.
  3. C) obtain assurance about the ending balance of the account only.
  4. D) verify each entry that was made into an account.

Answer:  B

Terms:  Setting audit objectives

Diff:  Moderate

Objective:  LO 6-7

AACSB:  Reflective thinking

 

2) The term audit objective refers to all of the following except for

  1. A) transaction-related audit objectives.
  2. B) presentation and disclosure-related audit objectives.
  3. C) balance-related audit objectives.
  4. D) cycle-related audit objectives.

Answer:  D

Terms:  Setting audit objectives

Diff:  Easy

Objective:  LO 6-7

AACSB:  Reflective thinking

3) When an auditor is determining what information to include in the notes to the financial statements relating to bonds payable, he is concerned with the transaction-related audit objectives.

Answer:  FALSE

Terms:  Setting audit objectives

Diff:  Moderate

Objective:  LO 6-7

AACSB:  Reflective thinking

 

4) It is generally impractical for the auditor to obtain complete assurance about the correctness of each class of transactions.

Answer:  TRUE

Terms:  Setting audit objectives

Diff:  Easy

Objective:  LO 6-7

AACSB:  Reflective thinking

 

 

6.8   Learning Objective 6-8

 

1) Which of the following is not one of the AICPA categories of assertions?

  1. A) assertions about classes of transactions and events for the period under audit
  2. B) assertions about financial statements and correspondence to GAAP
  3. C) assertions about account balances at period end
  4. D) assertions about presentation and disclosure

Answer:  B

Terms:  Categories of assertions

Diff:  Easy

Objective:  LO 6-8

AACSB:  Reflective thinking

 

2) If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the

  1. A) completeness assertion.
  2. B) existence assertion.
  3. C) cutoff assertion.
  4. D) classification assertion.

Answer:  D

Terms:  Violation of assertions

Diff:  Easy

Objective:  LO 6-8

AACSB:  Reflective thinking

3) International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements?

  1. A) assertions about classes of transactions for the period under audit
  2. B) assertions about account balances at period end
  3. C) assertions about the quality of source documents used to prepare the financial statements
  4. D) assertions about presentation and disclosure

Answer:  C

Terms:  Management assertions

Diff:  Easy

Objective:  LO 6-8

AACSB:  Reflective thinking

 

 

4) Management assertions are

  1. A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.
  2. B) stated in the footnotes to the financial statements.
  3. C) explicitly expressed representations about the financial statements.
  4. D) provided to the auditor in the assertions letter, but are not disclosed on the financial statements.

Answer:  A

Terms:  Management assertions

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

5) Management makes the following assertions about account balances:

  1. A) existence, completeness, classification and cutoff.
  2. B) existence, accuracy, classification and rights and obligations.
  3. C) existence, completeness, valuation and allocation, and rights and obligations.
  4. D) existence, completeness, rights and obligations, and cutoff.

Answer:  C

Terms:  Management assertions

Diff:  Challenging

Objective:  LO 6-8

AACSB:  Reflective thinking

 

6) Management’s disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion.

  1. A) completeness
  2. B) existence
  3. C) accuracy and valuation
  4. D) rights and obligations

Answer:  C

Terms:  Accuracy and valuation assertion

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

7) Which of the following assertions is described as “this assertion addresses whether all transactions that should be included in the financial statements are in fact included”?

  1. A) occurrence
  2. B) completeness
  3. C) rights and obligations
  4. D) existence

Answer:  B

Terms:  Assertion which addresses whether all transactions that should be included are included

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

8) Which of the following management assertions is not associated with classes of transactions and events?

  1. A) occurrence
  2. B) classification
  3. C) accuracy
  4. D) rights and obligations

Answer:  D

Terms:  Management assertion not associated with transaction-related audit objectives

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

9) With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance.

  1. A) existence
  2. B) account balances
  3. C) presentation and disclosure
  4. D) classes of transactions

Answer:  C

Terms:  Management assertions

Diff:  Easy

Objective:  LO 6-8

AACSB:  Reflective thinking

 

10) Briefly explain each management assertion related to classes of transactions and events for the period under audit.

Answer:

  • Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity.
  • Completeness. All transactions and events that should have been recorded have been recorded.
  • Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately.
  • Classification. Transactions and events have been recorded in the proper accounts.
  • Cutoff. Transactions and events have been recorded in the correct accounting period.

Terms:  Management assertions related to classes of transactions

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

11) Briefly explain each management assertion related to account balances at period end.

Answer:

  • Existence. Assets, liabilities, and equity interests exist.
  • Completeness. All assets, liabilities, and equity interests that should have been recorded have been recorded.
  • Valuation and allocation. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded.
  • Rights and obligations. The entity holds or controls the rights to assets, and liabilities are the obligation of the entity.

Terms:  Management assertions related to account balances at period end

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

12) Briefly explain each management assertion related to presentation and disclosure.

Answer:

  • Occurrence and rights and obligations. Disclosed events and transactions have occurred and pertain to the entity.
  • Completeness. All disclosures that should have been included in the financial statements have been included.
  • Accuracy and valuation. Financial and other information are disclosed appropriately and at appropriate amounts.
  • Classification and understandability. Financial and other information is appropriately presented and described and disclosures are clearly expressed.

Terms:  Management assertions related to presentation and disclosure

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

13) Relevant assertions have a meaningful bearing on whether the account is fairly stated and are used to assess the risk of material misstatement and the design and performance of audit procedures.

Answer:  TRUE

Terms:  Management assertions

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

14) The auditor’s audit objectives follow and are closely related to management assertions.

Answer:  TRUE

Terms:  Management assertions

Diff:  Moderate

Objective:  LO 6-8

AACSB:  Reflective thinking

 

6.9   Learning Objective 6-9

 

1) Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?

  1. A) The specific audit objectives are applicable to every class of transactions.
  2. B) The general audit objectives are applicable to every class of transactions.
  3. C) Once the specific transaction-related audit objectives are established, they can be used to develop the general transaction-related objectives.
  4. D) For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

Answer:  B

Terms:  Difference between general and specific audit objectives

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

2) The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction-related audit objective?

  1. A) existence
  2. B) completeness
  3. C) accuracy
  4. D) cut-off

Answer:  C

Terms:  Evidence for transaction-related audit objective if recorded sales are for amount shipped and correctly billed and recorded

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Analytic thinking

 

3) The posting and summarization audit objective is the auditor’s counterpart to management’s assertion of

  1. A) occurrence.
  2. B) completeness.
  3. C) accuracy.
  4. D) classification.

Answer:  C

Terms:  Transaction-related audit objectives

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

 

4) ________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions).

  1. A) Occurrence; completeness
  2. B) Completeness; occurrence
  3. C) Accuracy; classification
  4. D) Classification; accuracy

Answer:  A

Terms:  General and specific audit objectives

Diff:  Challenging

Objective:  LO 6-9

AACSB:  Reflective thinking

5) In the context of the audit of sales, distinguish between the occurrence and completeness transaction-related audit objectives. State the effect on the sales account (overstatement or understatement) of a violation of each objective.

Answer:  When testing the occurrence objective for sales, the auditor’s focus is on whether the sales that have been recorded in the sales journal actually occurred. In contrast, tests of the completeness objective are concerned with determining whether all sales that actually occurred have been recorded in the sales journal. Violations of the occurrence objective result in overstatements of sales; violations of the completeness objective result in understatements of sales.

Terms:  General and specific audit objectives

Diff:  Challenging

Objective:  LO 6-9

AACSB:  Reflective thinking

 

6) Below are five audit procedures, all of which are tests of transactions associated with the audit of the sales and collection cycle. Also below are the six general transaction-related audit objectives and the five management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested.

 

Audit Objectives

A. occurrence

B. completeness

C. accuracy

D. posting and summarization

E. classification

F. timing

Assertions

V. occurrence

W. completeness

X. accuracy

Y. classification

Z. cutoff

 

 

  1. Vouch recorded sales from the sales journal to the file of bills of lading.

(1) ________

(2) ________

 

  1. Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in recording sales transactions.

(1) ________

(2) ________

 

  1. Account for the sequence of prenumbered bills of lading and sales invoices.

(1) ________

(2) ________

 

  1. Trace from a sample of prelistings of cash receipts to the cash receipts journal, testing for names, amounts, and dates.

(1) ________

(2) ________

 

  1. Examine customer order forms for credit approval by the credit manager.

(1) ________

(2) ________

Answer:

  1. (1) A (2) V
  2. (1) F (2) Z
  3. (1) B (2) W
  4. (1) B, C (2) W, X
  5. (1) A (2) V

Terms:  Management assertions and transaction-related audit objectives

Diff:  Challenging

Objective:  LO 6-9

AACSB:  Analytic thinking

 

7) Below are five audit procedures, all of which are tests of transactions associated with the audit of the acquisition and payment cycle. Also below are the six general transaction-related audit objectives and the five management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested.

 

Audit Objectives

A. occurrence

B. completeness

C. accuracy

D. posting and summarization

E. classification

F. timing

Assertions

V. occurrence

W. completeness

X. accuracy

Y. classification

Z. cutoff

 

 

  1. Foot the purchases journal and trace the totals to the related general ledger accounts.

(1) ________

(2) ________

 

  1. Recompute the cash discounts taken by the client.

(1) ________

(2) ________

 

  1. Compare dates on cancelled checks with the bank cancellation date.

(1) ________

(2) ________

 

  1. Trace from a sample of cancelled checks to the cash disbursements journal.

(1) ________

(2) ________

 

  1. Examine supporting documentation for a sample of transactions for authorized payee and amount and to determine services or goods were received.

(1) ________

(2) ________

Answer:

  1. (1) D (2) X
  2. (1) C (2) X
  3. (1) F (2) Z
  4. (1) B (2) W
  5. (1) A (2) V

Terms:  Management assertions and transaction-related audit objectives

Diff:  Challenging

Objective:  LO 6-9

AACSB:  Analytic thinking

 

 

8) General transaction-related audit objectives vary from audit to audit, depending on the nature and characteristics of the client’s business and industry.

Answer:  FALSE

Terms:  General transaction-related audit objectives

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

9) The audit objective of posting and summarization is associated with the management assertion of accuracy.

Answer:  TRUE

Terms:  Audit objective of posting and summarization; Accuracy management assertion

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

10) The transaction-related audit objective of timing is related to the assertion of cutoff.

Answer:  TRUE

Terms:  Transaction-related audit objective of timing; Cutoff assertion

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

11) If a sale was for a valid shipment, but the amount of the sales invoice was calculated incorrectly, the accuracy objective was violated.

Answer:  TRUE

Terms:  General transaction-related audit objectives

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

12) The effect of a violation of the completeness transaction-related audit objective for cash disbursements transactions would be an overstatement of cash disbursements.

Answer:  FALSE

Terms:  Completeness transaction-related audit objective

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

13) The transaction-related audit objective that deals with whether recorded transactions have actually occurred is the completeness objective.

Answer:  FALSE

Terms:  Transaction-related audit objective; Completeness objective

Diff:  Moderate

Objective:  LO 6-9

AACSB:  Reflective thinking

 

6.10   Learning Objective 6-10

 

1) In testing for cutoff, the objective is to determine

  1. A) whether all of the current period’s transactions are recorded.
  2. B) whether transactions are recorded in the correct accounting period.
  3. C) the proper cutoff between capitalizing and expensing expenditures.
  4. D) the proper cutoff between disclosing items in footnotes or in account balances.

Answer:  B

Terms:  Objective in testing cutoff

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

2) The detail tie-in objective is not concerned that the details in the account balance

  1. A) agree with related subsidiary ledger amounts.
  2. B) are properly disclosed in accordance with GAAP.
  3. C) foot to the total in the account balance.
  4. D) agree with the total in the general ledger.

Answer:  B

Terms:  Detail tie-in objective

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

3) The detail tie-in is part of the ________ assertion for account balances.

  1. A) classification
  2. B) valuation and allocation
  3. C) rights and obligations
  4. D) completeness

Answer:  B

Terms:  Detail tie-in is and assertion for account balances

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

4) The classification balance-related audit objective

  1. A) involves determining if items included on a client’s listing are included in the correct general leger accounts.
  2. B) is the counterpart to the management assertion of completeness.
  3. C) involves determining if items included on a client’s listing are disclosed properly in the financial statements.
  4. D) involves tying in the account balances to the general ledger.

Answer:  A

Terms:  Balance-related audit objectives

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

5) Balance-related audit objectives

  1. A) are never applied to income statement accounts.
  2. B) are designed to detect fraud.
  3. C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances.
  4. D) can have only one specific-related audit objectives.

Answer:  C

Terms:  Balance-related audit objectives

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

6) Which of the following statements is not true?

  1. A) Balance-related audit objectives are applied to ending account balances.
  2. B) Transaction-related audit objectives are applied to classes of transactions.
  3. C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts.
  4. D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

Answer:  D

Terms:  Balance-related and transaction-related audit objectives

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

7) Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective.

  1. A) occurrence
  2. B) completeness
  3. C) presentation and disclosure
  4. D) classification and understandability

Answer:  C

Terms:  Presentation and disclosure-related objectives

Diff:  Easy

Objective:  LO 6-10

AACSB:  Reflective thinking

 

 

8) An important balance-related audit objective is realizable value. Describe the purpose of this audit objective, what it is concerned with, and give an example.

Answer:  The purpose of this audit objective is to make sure that assets are included on the balance sheet at the amounts estimated to be realized.

 

It is concerned with whether an account balance has been reduced for declines from historical cost or when accounting standards require a fair value accounting treatment for the account. It is concerned with valuation and allocation. It generally applies only to asset accounts, although some liabilities are recorded at fair value.

 

Examples include the allowance for uncollectible accounts, and write-downs of inventory for obsolescence.

Terms:  Balance-related objective of realizable value

Diff:  Challenging

Objective:  LO 6-10

AACSB:  Reflective thinking

 

9) Below are five audit procedures, all of which are tests of balances associated with the audit of accounts receivable. Also below are the eight general balance-related audit objectives and the four management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested.

 

Audit Objectives

A. existence

B. completeness

C. accuracy

D. classification

E. cutoff

F. detail tie-in

G. realizable value

H. rights and obligations

Assertions

V. existence

W. completeness

X. valuation and allocation

Y. rights and obligations

 

 

 

 

 

  1. Obtain an aged listing of accounts receivable. For a sample of individual customers on the listing, agree the customer’s name, amount, and other information with the corresponding information in the accounts receivable master file.

(1) ________

(2) ________

 

  1. Examine details of sales for five days before and five days after year-end to determine whether sales have been recorded in the proper period.

(1) ________

(2) ________

 

  1. Assess the reasonableness of the balance in the allowance for doubtful accounts.

(1) ________

(2) ________

  1. Inquire as to whether any accounts receivable have been factored or sold during the period.

(1) ________

(2) ________

 

  1. Inquire as to whether there are any receivables from related parties.

(1) ________

(2) ________

Answer:

  1. (1) F (2) X
  2. (1) E (2) X
  3. (1) G (2) X
  4. (1) H (2) Y
  5. (1) D (2) X

Terms:  Management assertions and balance-related audit objectives

Diff:  Challenging

Objective:  LO 6-10

AACSB:  Analytic thinking

 

10) Balance-related audit objectives follow from management assertions.

Answer:  TRUE

Terms:  Balance-related audit objectives

Diff:  Easy

Objective:  LO 6-10

AACSB:  Reflective thinking

11) Balance-related audit objectives are usually applied to the ending balance in income statement accounts; transaction-related audit objectives are usually applied to transactions reflected in balance sheet accounts.

Answer:  FALSE

Terms:  Balance-related audit objectives; Transaction-related audit objectives

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

12) Tests of details of balances typically involve the use of comparisons and relationships to assess the overall reasonableness of account balances.

Answer:  FALSE

Terms:  Tests of details of balances

Diff:  Easy

Objective:  LO 6-10

AACSB:  Reflective thinking

 

13) The general balance-related audit objective that deals with determining that details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total in the general ledger is the detail tie-in objective.

Answer:  TRUE

Terms:  Detail tie-in objective; General balance-related objective

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

14) The cutoff objective, “transactions near the balance sheet date are recorded in the proper period,” is a balance-related audit objective.

Answer:  TRUE

Terms:  Cutoff objective; Balance-related audit objective

Diff:  Moderate

Objective:  LO 6-10

AACSB:  Reflective thinking

 

 

15) The presentation and disclosure-related audit objectives are identical to the management assertions for presentation and disclosure.

Answer:  TRUE

Terms:  Presentation and disclosure-related objectives

Diff:  Easy

Objective:  LO 6-10

AACSB:  Reflective thinking

6.11   Learning Objective 6-11

 

1) The procedures used to test the effectiveness of the internal controls are known as

  1. A) tests of transactions.
  2. B) tests of controls.
  3. C) substantive analytical procedures.
  4. D) control risk.

Answer:  B

Terms:  Tests of controls

Diff:  Easy

Objective:  LO 6-11

AACSB:  Reflective thinking

 

2) Which of the following statements is not correct?

  1. A) There are many ways an auditor can accumulate evidence to meet overall audit objectives.
  2. B) Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.
  3. C) It is appropriate to minimize the cost of accumulating evidence.
  4. D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

Answer:  D

Terms:  Considerations for accumulating evidence

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

 

3) Two overriding considerations affect the many ways an auditor can accumulate evidence:

  1. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.
  2. Cost of accumulating evidence should be minimized.

 

In evaluating these considerations

  1. A) the first is more important than the second.
  2. B) the second is more important than the first.
  3. C) they are equally important.
  4. D) it is impossible to prioritize them.

Answer:  A

Terms:  Considerations for accumulating evidence

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

4) If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor

  1. A) can issue an unqualified opinion.
  2. B) can significantly reduce other substantive tests.
  3. C) can write the engagement letter.
  4. D) needs to perform additional tests of controls so that the assurance level can be increased.

Answer:  B

Terms:  Auditor obtained reasonable level of assurance about fair presentation

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

5) After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on

  1. A) generally accepted auditing standards.
  2. B) the AICPA’s Code of Professional Conduct.
  3. C) generally accepted accounting principles.
  4. D) the auditor’s professional judgment.

Answer:  D

Terms:  After auditor completed all audit procedures

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

 

6) Direct, written communication with the client’s customers to identify whether a receivable exists is an example of a(n)

  1. A) substantive test of transactions.
  2. B) test of controls.
  3. C) analytical procedure.
  4. D) test of details of balances.

Answer:  D

Terms:  Tests of details of balances

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

7) ________ are used as evidence to provide assurance about an account balance.

  1. A) Substantive analytical procedures
  2. B) Tests of transactions
  3. C) Audit risks
  4. D) Tests of details of balances

Answer:  A

Terms:  Analytical procedures; Substantive tests

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

8) List the four phases of a financial statement audit.

Answer:

  1. plan and design an audit approach based on risk assessment procedures
  2. perform tests of controls and substantive tests of transactions
  3. perform substantive analytical procedures and tests of details of balances
  4. complete the audit and issue an audit report

Terms:  Phases of financial statement audit

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

 

9) Describe what analytical procedures and tests of details of balances are and give an example of each.

Answer:  Analytical procedures consist of evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data. Analytical procedures use comparisons and relationships to assess whether account balances and other data appear reasonable. An example of an analytical procedure is to examine sales transactions in the sales journal for unusually large amounts and/or compare monthly sales with prior years.

 

Tests of details of balances are specific procedures intended to test for monetary misstatements in balances in the financial statements. An example is direct written communication with the client’s customers to identify any incorrect amounts.

Terms:  Analytical procedures and tests of balances

Diff:  Challenging

Objective:  LO 6-11

AACSB:  Reflective thinking

 

10) Match seven of the terms (a-k) with the definitions provided below (1-7):

 

  1. tests of details of balances
  2. tests of controls
  3. substantive tests of transactions
  4. analytical procedures
  5. transaction-related audit objectives
  6. management assertions
  7. balance-related audit objectives
  8. fraud
  9. illegal act
  10. error
  11. management fraud

 

________ 1. an intentional misstatement of the financial statements

 

________ 2. a set of six audit objectives the auditor must meet, including timing, posting and summarization, and accuracy

 

________ 3. implied or expressed representations made by the client about classes of transactions, account balances and disclosures in the financial statements

 

________ 4. audit procedures testing for monetary misstatements to determine whether the balance-related audit objectives have been satisfied for each significant account balance

 

________ 5. a set of nine audit objectives the auditor must meet, including completeness, detail tie-in, and rights and obligations

 

________ 6. audit procedures designed to test the effectiveness of control policies and procedures

 

________ 7. use of comparisons and relationships to assess whether account balances or other data appears reasonable

Answer:

  1. h
  2. e
  3. f
  4. a
  5. g
  6. b
  7. d

Terms:  Tests of balances; Tests of controls; Substantive tests of transactions; Analytical procedures; Management assertions; Balance-related audit objectives; Fraud

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

11) When an auditor has reduced assessed control risk based on tests of controls, he or she may then reduce the extent to which the accuracy of the financial statement information directly related to those controls must be supported through the accumulation of evidence using substantive tests.

Answer:  TRUE

Terms:  Tests of controls; Assessed control risk

Diff:  Easy

Objective:  LO 6-11

AACSB:  Reflective thinking

 

12) For a private company audit, tests of controls are normally performed only on those internal controls the auditor believes have not been operating effectively during the period under audit.

Answer:  FALSE

Terms:  Tests of controls

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

13) Rights and obligations is the only balance-related assertion without a similar transaction-related assertion.

Answer:  TRUE

Terms:  Audit process

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

14) The audit objectives are the well-defined methodology for organizing an audit to ensure that the evidence gathered is sufficient and appropriate.

Answer:  FALSE

Terms:  Audit process

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

15) Obtaining an understanding of the entity and its environment is part of the analytical procedures phase of the audit.

Answer:  FALSE

Terms:  Audit process

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

 

16) An auditor assesses the risk of material misstatement to determine the impact on the audit plan and to determine the nature, extent, and timing of the audit procedures.

Answer:  TRUE

Terms:  Audit process

Diff:  Moderate

Objective:  LO 6-11

AACSB:  Reflective thinking

 

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 7   Audit Evidence

 

7.1   Learning Objective 7-1

 

1) Which of the following is an accurate statement regarding audit evidence?

  1. A) Responses to the auditor’s questions by client employees is considered highly persuasive evidence.
  2. B) Audit evidence should provide an absolute level of assurance.
  3. C) The auditor uses evidence to determine whether the statements are fairly presented.
  4. D) All evidence must be highly persuasive.

Answer:  C

Terms:  Nature of audit evidence

Diff:  Easy

Objective:  LO 7-1

AACSB:  Reflective thinking

 

2) All evidence must have the same level of persuasiveness.

Answer:  FALSE

Terms:  Nature of audit evidence

Diff:  Easy

Objective:  LO 7-1

AACSB:  Reflective thinking

 

3) Auditors use evidence to help them draw conclusions.

Answer:  TRUE

Terms:  Nature of audit evidence

Diff:  Easy

Objective:  LO 7-1

AACSB:  Reflective thinking

 

7.2   Learning Objective 7-2

 

1) Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence?

  1. A)
Sample size Timing of audit procedures
Yes Yes

 

  1. B)
Sample size Timing of audit procedures
No No

 

  1. C)
Sample size Timing of audit procedures
Yes No

 

  1. D)
Sample size Timing of audit procedures
No Yes

 

Answer:  A

Terms:  Audit evidence decisions

Diff:  Easy

Objective:  LO 7-2

AACSB:  Reflective thinking

 

 

2) When can audit procedures be performed?

  1. A)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes Yes

 

  1. B)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No No

 

  1. C)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes No

 

  1. D)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No Yes

 

Answer:  A

Terms:  Timing of audit procedures

Diff:  Easy

Objective:  LO 7-2

AACSB:  Reflective thinking

3) A(n) ________ is the detailed instruction that explains the audit evidence to be obtained during the audit.

  1. A) audit objective
  2. B) audit procedure
  3. C) audit assertion
  4. D) audit program

Answer:  B

Terms:  Audit evidence and audit procedures

Diff:  Easy

Objective:  LO 7-2

AACSB:  Analytic thinking

 

 

4) Which of the following is not one of the four decisions about what evidence to gather and how much of it to accumulate?

  1. A) which audit procedures to use
  2. B) which accounts must agree to the general ledger
  3. C) when to perform the procedures
  4. D) what sample size to select for a given procedure

Answer:  B

Terms:  Audit evidence and audit procedures

Diff:  Easy

Objective:  LO 7-2

AACSB:  Analytic thinking

 

5) When making audit evidence decisions,

  1. A) the auditor decides which items in the population to test before determining the sample size.
  2. B) the sample size for any given procedure must remain constant from audit to audit.
  3. C) audit engagement software can assist the auditor in making evidence decisions.
  4. D) the auditor is required to use the sample sizes that are determined by the PCAOB.

Answer:  C

Terms:  Audit evidence and sample size

Diff:  Moderate

Objective:  LO 7-2

AACSB:  Reflective thinking

 

6) An audit program is the list of audit procedures for an audit area or an entire audit.

Answer:  TRUE

Terms:  Audit program

Diff:  Easy

Objective:  LO 7-2

AACSB:  Reflective thinking

7.3   Learning Objective 7-3

 

1) Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which provides the auditor with the most reliable audit evidence?

  1. A) general ledger account balances
  2. B) confirmation of accounts receivable balance received from a customer
  3. C) internal memo explaining the issuance of a credit memo
  4. D) copy of month-end adjusting entries

Answer:  B

Terms:  Audit evidence qualities of relevance and reliability

Diff:  Easy

Objective:  LO 7-3

AACSB:  Analytic thinking

 

 

2) Which of the following is not a characteristic of the reliability of evidence?

  1. A) effectiveness of client internal controls
  2. B) education of auditor
  3. C) independence of information provider
  4. D) timeliness

Answer:  B

Terms:  Characteristics of reliable evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

3) The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must

  1. A) be well documented and cross-referenced in the audit documents.
  2. B) be based on sources that are external to company.
  3. C) provide evidence that prove or disprove an audit objective/assertion.
  4. D) be persuasive enough to enable the auditor to issue an audit report.

Answer:  D

Terms:  Sufficient evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

4) Audit evidence obtained directly by the auditor will not be reliable if

  1. A) the auditor lacks the competence to evaluate the evidence.
  2. B) it is provided by the client’s attorney.
  3. C) the client denies its veracity.
  4. D) it is impossible for the auditor to obtain additional corroboratory evidence.

Answer:  A

Terms:  Audit evidence obtained directly by auditor

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

5) Appropriateness of evidence is a measure of the

  1. A) quantity of evidence.
  2. B) quality of evidence.
  3. C) sufficiency of evidence.
  4. D) meaning of evidence.

Answer:  B

Terms:  Appropriateness of audit evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

 

6) Which of the following statements regarding the relevance of evidence is correct?

  1. A) To be relevant, evidence must pertain to the audit objective of the evidence.
  2. B) To be relevant, evidence must be persuasive.
  3. C) To be relevant, evidence must relate to multiple audit objectives.
  4. D) To be relevant, evidence must be derived from a system including effective internal controls.

Answer:  A

Terms:  Relevance of evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

7) Two determinants of the persuasiveness of evidence are

  1. A) competence and sufficiency.
  2. B) relevance and reliability.
  3. C) appropriateness and sufficiency.
  4. D) independence and effectiveness.

Answer:  C

Terms:  Determinants of persuasiveness of evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

8) The two characteristics of the appropriateness of evidence are

  1. A) relevance and timeliness.
  2. B) relevance and accuracy.
  3. C) relevance and reliability.
  4. D) reliability and accuracy.

Answer:  C

Terms:  Appropriateness of audit evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

9) Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion about marketable securities and other investments held by the company?

  1. A) responses to auditor’s questions by the president and controller regarding the investments account
  2. B) correspondence with a stockbroker regarding the quantity of client’s investments held in street name by the broker
  3. C) minutes of the board of directors authorizing the purchase of stock as an investment
  4. D) the auditor’s count of marketable securities

Answer:  A

Terms:  Least persuasive form of evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

10) Which of the following statements is not correct?

  1. A) It is possible to vary the sample size from one unit to 100% of the items in the population.
  2. B) Cost is an adequate justification for not gathering an adequate sample size.
  3. C) The decision of how many items to test must be made by the auditor for each audit procedure.
  4. D) The sample size for any given procedure is likely to vary from audit to audit.

Answer:  B

Terms:  Persuasive audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

11) For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which statement below is not correct regarding the appropriateness of audit evidence?

  1. A) The more effective the internal control system, the more assurance it provides the auditor about the reliability of financial reporting by the client.
  2. B) An auditor’s opinion, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm.
  3. C) Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity.
  4. D) The independent auditor’s direct personal knowledge, obtained through inquiry, observation and inspection, is generally more persuasive than information obtained indirectly.

Answer:  B

Terms:  Appropriateness of audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

12) Which of the following is a correct statement regarding audit evidence?

  1. A) A large sample of evidence provided by an independent party is always considered persuasive evidence.
  2. B) A small sample of only one or two pieces of highly appropriate evidence is always considered persuasive evidence.
  3. C) The auditor must obtain a sufficient amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements.
  4. D) Evidence is usually more reliable for balance sheet accounts when it is obtained within six months of the balance sheet date.

Answer:  C

Terms:  Audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

 

13) Which of the following is the most objective type of evidence?

  1. A) a letter written by the client’s attorney discussing the likely outcome of outstanding lawsuits
  2. B) the physical count of securities and cash
  3. C) inquiries of the credit manager about the collectability of noncurrent accounts receivable
  4. D) observation of cobwebs on some inventory bins

Answer:  B

Terms:  Most objective type of audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

14) Which items affect the sufficiency of evidence when choosing a sample?

  1. A)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes Yes

 

  1. B)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No No

 

  1. C)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes No

 

  1. D)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No Yes

 

Answer:  C

Terms:  Sufficiency of evidence when choosing a sample

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

15) Determine which of the following is most correct statement regarding the reliability of audit evidence.

  1. A) Information that is indirectly obtained from external sources is the most reliable audit evidence.
  2. B) Reliability of audit evidence is dependent upon the evidence being subjective.
  3. C) Reliability of evidence refers to the amount of evidence obtained.
  4. D) If internal controls are effective, evidence obtained is more reliable than when the controls are not effective.

Answer:  D

Terms:  Reliability of audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

16) Evidence is generally considered appropriate when

  1. A) it has been obtained by random selection.
  2. B) there is enough of it to afford a reasonable basis for an opinion on financial statements.
  3. C) it is relevant to the audit objective being tested.
  4. D) it consists of written statements made by managers of the company under audit.

Answer:  C

Terms:  Evidence considered appropriate

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

17) Given the economic and time constraints in which auditors can collect evidence regarding management assertions about the financial statements, the auditor normally gathers evidence that is

  1. A) irrefutable.
  2. B) conclusive.
  3. C) persuasive.
  4. D) completely convincing.

Answer:  C

Terms:  Persuasive audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

 

18) Which of the following statements is not a correct statement regarding audit evidence?

  1. A) Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.
  2. B) Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.
  3. C) Documents that originate outside the company are considered more reliable than those that originate within the client’s organization.
  4. D) External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.

Answer:  B

Terms:  Audit evidence

Diff:  Challenging

Objective:  LO 7-3

AACSB:  Reflective thinking

19) Evidence is usually more persuasive for balance sheet accounts when it is obtained

  1. A) as close to the balance sheet date as possible.
  2. B) only from transactions occurring on the balance sheet date.
  3. C) from various times throughout the client’s year.
  4. D) from the time period when transactions in that account were most numerous during the fiscal period.

Answer:  A

Terms:  Evidence is more persuasive for balance sheet accounts

Diff:  Challenging

Objective:  LO 7-3

AACSB:  Reflective thinking

 

20) Which of the following statements is true?

  1. A) Evidence must be relevant to all of the audit objectives.
  2. B) If evidence is subjective, it cannot be reliable.
  3. C) Evidence obtained directly by the auditor may not be reliable if the auditor lacks the qualifications to evaluate the evidence.
  4. D) The persuasiveness of evidence can be evaluated after considering its sufficiency.

Answer:  C

Terms:  Audit process

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

 

21) Which of the following statements relating to the competence of evidential matter is always true?

  1. A) Evidence from outside an enterprise is always reliable.
  2. B) Accounting data developed under satisfactory conditions of internal control is not reliable.
  3. C) Oral representations made by management are not reliable evidence.
  4. D) Evidence must be both reliable and relevant to be considered appropriate.

Answer:  D

Terms:  Competence of evidential matter

Diff:  Challenging

Objective:  LO 7-3

AACSB:  Reflective thinking

22) Discuss three of the following characteristics of relevant evidence.

  1. Independence of provider
  2. Effectiveness of client’s internal controls
  3. Auditor’s direct knowledge
  4. Qualification of individuals providing the information
  5. Degree of objectivity
  6. Timeliness

Answer:

  1. Independence of provider — Evidence obtained from a source outside the entity is more reliable and persuasive than that obtained from within.
  2. Effectiveness of client’s internal controls — When a client’s internal controls are effective, evidence obtained is more reliable than when the controls are not effective.
  3. Auditor’s direct knowledge — Evidence obtained directly by the auditor through physical examination, observation, computation and inspection is more reliable than information obtained indirectly.
  4. Qualification of individuals providing the information — Although the source of information is independent, the evidence will not be reliable unless the individual providing it is qualified to do so. Communications from attorneys and bank confirmations are typically more highly regarded than accounts receivable confirmations from persons not familiar with the business world. Also, evidence obtained directly by the auditor may not be reliable if the auditor lacks the qualifications to evaluate the evidence.
  5. Degree of objectivity — Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct.
  6. Timeliness — The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible.

Terms:  Characteristics of reliable evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

 

23) 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 relates to the assertion being tested. Reliability refers to the degree to which evidence can be believable or worthy of trust.

Terms:  Appropriateness of audit evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

24) The reliability of evidence refers to the degree to which evidence is considered believable or trustworthy. There are six factors that affect the reliability of audit evidence. One factor is the independence of the provider; i.e., evidence obtained from a source outside the client company is more reliable than that obtained within. Identify and discuss any two of the remaining five factors.

Answer:  The remaining four factors that affect the reliability of evidence are:

  • Effectiveness of client’s internal control. When a client’s internal controls are effective, evidence obtained from the client is more reliable than when controls are not effective.
  • Auditor’s direct knowledge. Evidence obtained directly by the auditor is more reliable than information obtained indirectly.
  • Qualifications of individuals providing the information. Although the source of the information may be independent, the evidence will not be reliable unless the individual providing it is qualified to do so. Also, evidence obtained directly by the auditor many not be reliable if the auditor lacks the qualifications to evaluate the evidence.
  • Degree of objectivity. Objective evidence is more reliable than evidence that requires considerable judgment to determine whether it is correct.
  • Timeliness — The timeliness of audit evidence can refer either to when it is accumulated or to the period covered by the audit. Evidence is usually more reliable for balance sheet accounts when it is obtained as close to the balance sheet date as possible.

Terms:  Reliability of evidence

Diff:  Challenging

Objective:  LO 7-3

AACSB:  Reflective thinking

 

25) Audit evidence to support an opinion about the fairness of a client’s financial statements consists entirely of written information.

Answer:  FALSE

Terms:  Audit evidence to support an opinion

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

 

26) The relevance of audit evidence depends on the audit objective being tested.

Answer:  TRUE

Terms:  Relevance of audit evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

27) Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit objective.

Answer:  FALSE

Terms:  Inquiries of client; Appropriate evidence

Diff:  Easy

Objective:  LO 7-3

AACSB:  Reflective thinking

 

28) Objective evidence is more reliable, and hence more persuasive, than subjective evidence.

Answer:  TRUE

Terms:  Objective evidence

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

29) The two most important factors when determining the appropriate sample size in an audit are the auditor’s expectation of misstatements and the objectivity of the evidence.

Answer:  FALSE

Terms:  Sufficiency of evidence and sample size

Diff:  Moderate

Objective:  LO 7-3

AACSB:  Reflective thinking

 

7.4   Learning Objective 7-4

 

1) Calculating the gross margin for the current audit year as a percent of sales and comparing it with previous years is what type of evidence?

  1. A) physical examination
  2. B) analytical procedures
  3. C) observation
  4. D) inquiry

Answer:  B

Terms:  Vouching as an audit procedure

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

 

2) When the auditor uses supporting evidence for amounts posted to account balances with documentary evidence, that process is called

  1. A) inquiry.
  2. B) confirmation.
  3. C) vouching.
  4. D) physical examination.

Answer:  C

Terms:  Auditor develops supporting evidence for amounts posted with documentary evidence

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

3) An example of an external document that provides reliable information for the auditor is: a(n)

  1. A) employees’ time report.
  2. B) bank statement.
  3. C) purchase order for company purchases.
  4. D) carbon copies of a check.

Answer:  B

Terms:  External document

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

4) An example of a document the auditor receives from the client, but which was prepared by someone outside the client’s organization is a

  1. A) confirmation.
  2. B) sales invoice.
  3. C) vendor invoice.
  4. D) bank reconciliation.

Answer:  C

Terms:  External document

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

5) The evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data is the definition of

  1. A) analytical procedures.
  2. B) tests of transactions.
  3. C) tests of balances.
  4. D) auditing.

Answer:  A

Terms:  Types of audit evidence; analytical procedures

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

6) Audit procedures can result in significant, unexpected differences. The auditor should investigate further if

  1. A)
Significant differences are not expected but do exist Significant differences are expected but do not exist
Yes Yes

 

  1. B)
Significant differences are not expected but do exist Significant differences are expected but do not exist
No No

 

  1. C)
Significant differences are not expected but do exist Significant differences are expected but do not exist
Yes No

 

  1. D)
Significant differences are not expected but do exist Significant differences are expected but do not exist
No Yes

 

Answer:  A

Terms:  Audit procedures result in significant differences

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

7) When the auditor uses tracing as an audit procedure for tests of transactions, she is primarily concerned with which audit objective?

  1. A) occurrence
  2. B) completeness
  3. C) cutoff
  4. D) classification

Answer:  B

Terms:  Tracing as an audit procedure

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

 

8) When the auditor uses the audit procedure vouching she is primarily concerned with which of the following audit objectives when testing classes of transactions?

  1. A) occurrence
  2. B) completeness
  3. C) authorization
  4. D) classification

Answer:  A

Terms:  Vouching as an audit procedure

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

9) When auditors use documentation to support recorded transactions and amounts, the process is usually called

  1. A) tracing.
  2. B) confirmations.
  3. C) vouching.
  4. D) reperformance.

Answer:  C

Terms:  Vouching as an audit procedure

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

10) Analytical procedures must be used during which phase(s) of the audit?

  1. A)
Test of Controls Planning Completion
Yes Yes Yes

 

  1. B)
Test of Controls Planning Completion
No Yes Yes

 

  1. C)
Test of Controls Planning Completion
Yes No No

 

  1. D)
Test of Controls Planning Completion
No No No

 

Answer:  B

Terms:  Analytical procedures used during phases of the audit

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Analytic thinking

 

11) Auditors may decide to replace tests of details with analytical procedures when possible because the

  1. A) analytical procedures are more reliable.
  2. B) analytical procedures are considerably less expensive.
  3. C) analytical procedures are more persuasive.
  4. D) tests of details are more difficult to interpret.

Answer:  B

Terms:  Tests of details of balances; Substantive analytical procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

12) Factors that determine the auditor’s willingness to accept a document as reliable evidence include

  1. A) whether it is internal or external.
  2. B) whether it was created and processed under conditions of effective internal control.
  3. C) whether it is an original document or a photocopy.
  4. D) all of the above.

Answer:  D

Terms:  Documents as reliable audit evidence

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

13) “Physical examination” is the inspection or count by the auditor of items such as

  1. A) cash, inventory, and payroll timecards.
  2. B) cash, inventory, canceled checks, and sales documents.
  3. C) cash, inventory, canceled checks, and tangible fixed assets.
  4. D) cash, inventory, securities, notes receivable, and tangible fixed assets.

Answer:  D

Terms:  Types of audit evidence; physical examination

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

14) The primary purpose of audit procedures is to

  1. A) detect all errors or fraudulent activities as well as illegal activities.
  2. B) comply with auditing standards promulgated by the PCAOB for publicly held clients.
  3. C) gather corroborative audit evidence about management’s assertions regarding the client’s financial statements.
  4. D) determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual.

Answer:  C

Terms:  Primary purpose of audit procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

15) ________ generally provide the most reliable evidence.

  1. A) Confirmations
  2. B) Recalculations
  3. C) Reperformances
  4. D) Observations

Answer:  A

Terms:  Audit process

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

16) When practical and reasonable, U.S. auditing standards require the confirmation of

  1. A) individual transactions between organizations, such as sales transactions.
  2. B) accounts receivable.
  3. C) fixed asset additions.
  4. D) payroll expenses.

Answer:  B

Terms:  Confirmations

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

17) To be considered reliable evidence, confirmations must be controlled by

  1. A) the client’s employee responsible for accounts receivable.
  2. B) the external auditor.
  3. C) the client’s internal audit department.
  4. D) the client’s controller or CFO.

Answer:  B

Terms:  Confirmations controlled to be considered reliable evidence

Diff:  Challenging

Objective:  LO 7-4

AACSB:  Reflective thinking

 

 

18) Indicate whether confirmation of accounts receivable and accounts payable, provided they each are significant accounts, is required or optional.

  1. A)
Accounts Receivable Accounts Payable
Required Required

 

  1. B)
Accounts Receivable Accounts Payable
Required Optional

 

  1. C)
Accounts Receivable Accounts Payable
Optional Required

 

  1. D)
Accounts Receivable Accounts Payable
Optional Optional

 

Answer:  B

Terms:  Confirmation of accounts receivable and accounts payable

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

19) Physical examination

  1. A) is a direct means of verifying that an asset really exists.
  2. B) is sufficient evidence to verify that the existing assets are owned by the client.
  3. C) can be used for both tangible assets and documents.
  4. D) is not generally a reliable type of audit evidence.

Answer:  A

Terms:  Types of audit evidence; physical examination

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

20) Which of the following is not a correct combination of terms and related type of audit evidence?

  1. A) inquire — inquiries of client
  2. B) count — physical examination
  3. C) recompute — recalculation
  4. D) read — documentation

Answer:  D

Terms:  Combination of terms and related audit evidence

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

21) Which of the following is a correct statement regarding confirmations?

  1. A) Confirmations can be in oral or written form.
  2. B) Electronic confirmations are not acceptable under generally accepted auditing standards.
  3. C) Confirmations are generally used in the audit of fixed asset additions.
  4. D) Auditors consider alternative evidence available when determining if confirmations should be used.

Answer:  D

Terms:  Types of audit evidence; confirmations

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

22) The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to

  1. A) select a sample of duplicate sales invoices and trace each to related shipping documents.
  2. B) trace a sample of shipping documents to related duplicate sales invoices.
  3. C) trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.
  4. D) compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.

Answer:  B

Terms:  Audit procedure to gather relevant evidence that client fails to bill

Diff:  Challenging

Objective:  LO 7-4

AACSB:  Analytic thinking

 

23) ________ is the auditor’s examination of the client’s documents and records to substantiate that the information is included in the financial statements.

  1. A) Inspection
  2. B) Recalculation
  3. C) Observation
  4. D) Verification

Answer:  A

Terms:  Types of audit evidence; inspection

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Analytic thinking

 

24) When the auditor scans the sales journal looking for large and unusual transactions, he is gathering what type of evidence?

  1. A) inspection
  2. B) recalculation
  3. C) physical examination
  4. D) analytical procedures

Answer:  D

Terms:  Types of audit evidence; analytical procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

25) You are auditing the company’s purchasing process for goods and services. You are primarily concerned with the company not recording all purchase transactions. Which audit procedure below would be the most effective audit procedure in this case?

  1. A) vouching from the accounts payable account to the vendor invoices
  2. B) tracing vendor invoices to recorded amounts in the accounts payable account
  3. C) confirmation accounts payable recorded amounts
  4. D) reconciling the accounts payable subsidiary ledger to the accounts payable account

Answer:  B

Terms:  Audit procedure for recording all purchase transactions

Diff:  Challenging

Objective:  LO 7-4

AACSB:  Analytic thinking

 

26) Which of the following discoveries through the use of analytical procedures would most likely indicate a relatively high risk of financial failure?

  1. A) a decline in gross margin percentages
  2. B) an increase in the balance in fixed assets
  3. C) an increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased
  4. D) a higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets

Answer:  D

Terms:  Analytical procedures

Diff:  Challenging

Objective:  LO 7-4

AACSB:  Analytic thinking

 

27) Which of the following statements is correct regarding the costs involved in obtaining evidence?

  1. A)
Physical examination is usually the

least expensive type of audit

evidence

Cost of obtaining evidence may be a factor in deciding whether to

obtain that evidence

Yes Yes

 

  1. B)
Physical examination is usually the

least expensive type of audit

evidence

Cost of obtaining evidence may be a factor in deciding whether to

obtain that evidence

No No

 

  1. C)
Physical examination is usually the

least expensive type of audit

evidence

Cost of obtaining evidence may be a factor in deciding whether to

obtain that evidence

Yes No

 

  1. D)
Physical examination is usually the

least expensive type of audit

evidence

Cost of obtaining evidence may be a factor in deciding whether to

obtain that evidence

No Yes

 

Answer:  D

Terms:  Costs of obtaining audit evidence

Diff:  Challenging

Objective:  LO 7-4

AACSB:  Reflective thinking

 

28) One purpose of performing analytical procedures in the planning phase of an audit is to assess the client’s financial condition. Explain how the assessment of a client’s financial condition can affect the auditor’s decisions concerning evidence accumulation in later phases of the audit.

Answer:  Auditors must obtain knowledge about a client’s industry and business as a part of planning an audit. By conducting analytical procedures in which the current year’s unaudited information is compared with prior years’ audited information or industry data, changes are highlighted. These changes can represent important trends or specific events, all of which will influence audit planning.

 

The use of analytical procedures is often a useful indicator for determining whether the client company has financial problems and if substantial doubt exists about the entity’s ability to continue as a going concern. Certain analytical procedures can help the auditor assess the likelihood of failure.

 

If a higher-than-normal ratio of long-term debt to net worth is combined with a lower-than-average ratio of profits to total assets, a relatively high risk of financial failure may be indicated. Not only will such conditions affect the audit plan, they may indicate that substantial doubt exists about the entity’s ability to continue as a going concern, which requires an emphasis-of-matter explanatory paragraph in the audit report.

Terms:  Analytical procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

 

29) Define the following terms commonly used in audit procedures:

  1. examine
  2. scan
  3. compute
  4. foot
  5. compare
  6. count
  7. vouch

Answer:

  1. examine — a reasonably detailed study of a specific document or record to determine specific facts about it
  2. scan — a less detailed examination of a document or record to determine whether there is something unusual warranting further investigation
  3. compute — a calculation done by the auditor independent of the client
  4. foot — addition of a column of numbers to determine whether the total is the same as the client’s
  5. compare — a comparison of information in two different locations
  6. count — a determination of assets on hand at a given time. This term is associated only with the type of evidence defined as physical examination.
  7. vouch — the use of documents to verify recorded transactions or amounts

Terms:  Audit procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

30) Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) physical examination, (2) confirmation, (3) documentation, (4) observation, (5) inquiry of the client, (6) reperformance, and (7) analytical procedure.

 

Type of Evidence Audit Procedures
1. Watch client employees count inventory to determine whether company procedures are being followed.
2. Count inventory items and record the amount in the audit files.
3. Trace postings from the sales journal to the general ledger accounts.
4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year.
5. Obtain information about the client’s internal controls by asking questions of client personnel.
6. Trace column totals from the cash disbursements journal to the general ledger.
7. Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation.
8. Review the total of repairs and maintenance for each month to determine whether any month’s total was unusually large.
9. Compare vendor names and amounts on purchase invoices with entries in the purchases journal.
10. Foot entries in the sales journal to determine whether they were correctly totaled by the client.
11. Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact.
12. Obtain a written statement from the client’s bank stating the client’s year-end balance on deposit.

 

Answer:

  1. observation
  2. physical examination
  3. reperformance
  4. analytical procedure
  5. inquiry of the client
  6. reperformance
  7. physical examination
  8. analytical procedure
  9. documentation
  10. reperformance
  11. physical examination
  12. confirmation

 

Terms:  Audit evidence and audit procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

31) Match nine of the terms (a-k) with the definitions provided below (1-9):

 

  1. foot
  2. compute
  3. scan
  4. inquire
  5. count
  6. trace
  7. reperform
  8. read
  9. examine
  10. observe
  11. compare

 

________ 1. a calculation done by the auditor independent of the client

 

________ 2. addition of a column of numbers to determine if the total is the same as the client’s

 

________ 3. a comparison of information in two different locations

 

________ 4. a use of the senses to assess certain activities

 

________ 5. following details of transactions from original documents to journals

 

________ 6. a less detailed examination of a document or record to determine if there is something unusual warranting further investigation

 

________ 7. obtaining information from the client in response to specific questions

 

________ 8. a determination of assets on hand at a given time

 

________ 9. an examination of written information to determine facts pertinent to the audit

Answer:  1. b, 2. a, 3. k, 4. j, 5. f, 6. c, 7. d, 8. e, 9. h

Terms:  Audit procedures

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

32) Match five of the terms (a-h) with the definitions provided below (1-5):

 

  1. audit documentation
  2. audit procedures
  3. audit objectives
  4. analytical procedures
  5. budgets
  6. reliability of evidence
  7. sufficiency of evidence
  8. persuasiveness of evidence

 

________ 1. use of comparisons and relationships to assess the reasonableness of account balances

 

________ 2. detailed instructions for the collection of a type of audit evidence

 

________ 3. the degree to which evidence can be considered believable or trustworthy

 

________ 4. contains all the information that the auditor considers necessary to conduct an adequate audit and to provide support for the audit report

 

________ 5. this is determined by the amount of evidence obtained

Answer:

  1. d
  2. b
  3. f
  4. a
  5. g

Terms:  Audit procedures and audit evidence

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

33) Below are 10 documents typically examined during an audit. Classify each document as either internal or external.

 

Type of Document Documents
1. canceled checks for payments of accounts payable
2. payroll time cards
3. duplicate sales invoices
4. vendors’ invoices
5. bank statements
6. minutes of the board of directors’ meetings
7. signed lease agreements
8. notes receivable
9. subsidiary accounts receivable records
10. remittance advices

 

Answer:

  1. external 6.   internal
  2. internal 7.   external
  3. internal 8.   external
  4. external 9.   internal
  5. external 10.   external

Terms:  Internal and external evidence

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Analytic thinking

 

34) 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.

 

External documents are regarded as more reliable evidence than internal documents.

Terms:  Internal and external documentation; Reliability of evidence

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

 

35) Confirmations are among the most expensive type of evidence to obtain.

Answer:  TRUE

Terms:  Confirmations; Cost of evidence

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

36) Whenever practical and reasonable, the confirmation of accounts receivable is required of CPAs.

Answer:  TRUE

Terms:  Confirmations of accounts receivable required of CPAs

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

37) Inquiries of clients and recalculations normally have a low cost associated with them.

Answer:  TRUE

Terms:  Inquiries of clients and reperformance have low cost

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

38) When analytical procedures reveal unusual fluctuations in an account balance, the auditor will probably perform fewer tests of details for that account and increase the tests of controls related to the account.

Answer:  FALSE

Terms:  Analytical procedures reveal unusual fluctuations

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

39) The type of audit evidence known as inquiry requires the auditor to obtain oral or written information from the client in response to questions.

Answer:  TRUE

Terms:  Audit evidence; Inquiry

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

40) Auditor judgment is the primary determinant in determining the amount of evidence gathered.

Answer:  TRUE

Terms:  Auditor judgment; Evidence

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

41) Analytical procedures must be used in the planning and completion phases of the audit.

Answer:  TRUE

Terms:  Analytical procedures; Planning and completion phases of the audit

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

42) Confirmations are ordinarily used to verify account balances, but may be used to verify transactions.

Answer:  TRUE

Terms:  Confirmations to verify balances and transactions

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

43) Accounts receivable confirmations must be controlled by the client from the time they are prepared until the time they are returned to the auditor.

Answer:  FALSE

Terms:  Confirmations control

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

44) Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size.

Answer:  TRUE

Terms:  Cost of audit procedures; Sample size

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

45) When the auditor foots the journals and the subsidiary ledgers, it is considered reperformance.

Answer:  FALSE

Terms:  Types of audit evidence; recalculation

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

46) Inspection consists of looking at a process or procedure being performed by others.

Answer:  FALSE

Terms:  Types of audit evidence; inspection

Diff:  Moderate

Objective:  LO 7-4

AACSB:  Reflective thinking

 

 

47) A canceled check written by the client, made payable to a local supplier and drawn on the client’s bank account is one type of internal document.

Answer:  FALSE

Terms:  Internal document

Diff:  Easy

Objective:  LO 7-4

AACSB:  Reflective thinking

 

7.5   Learning Objective 7-5

 

1) Analytical procedures are so important that they are required during the

  1. A) planning and test of control phases.
  2. B) planning and completion phases.
  3. C) test of control and completion phases.
  4. D) planning, test of control, and completion phases.

Answer:  B

Terms:  Analytical procedures required

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

2) A benefit obtained from using industry averages is that it provides a(n)

  1. A) benchmark to compare the company’s results.
  2. B) indication where errors exist in the statements.
  3. C) benchmark to be used in evaluating a client’s budgets.
  4. D) comparison of “what is” with “what should be.”

Answer:  A

Terms:  Comparing client data with industry averages

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

3) Industry comparisons can be used as

  1. A) an aid to understanding the client’s business.
  2. B) an indicator of errors.
  3. C) an indicator of fraud.
  4. D) an aid to internal controls.

Answer:  A

Terms:  Benefit of industry comparisons

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

 

4) Analytical procedures

  1. A) performed during the audit planning phase generally use aggregate data.
  2. B) are never performed during the testing phase of an audit.
  3. C) are declining in importance as a type of audit evidence.
  4. D) performed during the audit planning stage help the auditor take a final objective look at the audited financial statements.

Answer:  A

Terms:  Analytical procedures

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

5) Analytical procedures performed during the planning phase of the audit

  1. A) are used as a substantive test in support of account balances.
  2. B) are used to assist in determining the nature, extent, and timing of audit procedures
  3. C) are used to detect fraud.
  4. D) are mandatory only for public companies.

Answer:  B

Terms:  Analytical procedures in planning phase

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

6) Analytical procedures performed during the completion stage of the audit

  1. A) help the auditor understand the client’s business and industry.
  2. B) are typically performed by a senior partner with extensive knowledge of the client’s business.
  3. C) help the auditor identify significant matters requiring special attention later in the engagement.
  4. D) all of the above

Answer:  B

Terms:  Analytical procedures; Completion stage of audit

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

7) Substantive analytical procedures performed during the testing phase of the audit

  1. A) are required under generally accepted auditing standards.
  2. B) are always done independently from other audit procedures.
  3. C) are used as a substantive test in support of account balances.
  4. D) do not need to be documented in the working papers.

Answer:  C

Terms:  Analytical procedures in stages of audit

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

 

8) Auditors compare client data with

  1. A) industry data.
  2. B) client-determined expected results.
  3. C) similar prior-period data.
  4. D) all of the above.

Answer:  D

Terms:  Analytical procedures

Diff:  Easy

Objective:  LO 7-5

AACSB:  Reflective thinking

 

9) Which of the following is not a weakness of using industry averages for auditing?

  1. A) The industry data are broad averages.
  2. B) Different companies follow different accounting methods.
  3. C) They can be helpful in identifying potential misstatements.
  4. D) All of the above are weaknesses.

Answer:  C

Terms:  Analytical analysis; comparison of client and industry data

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

10) When comparing client data with similar prior-period data,

  1. A) if there has been no significant changes in the client’s operations in the current year, much of the detail making up the totals in the financial statements should remain unchanged.
  2. B) comparison of details must take the form of details over time.
  3. C) comparing totals with previous years considers growth in the business activity.
  4. D) percent relationships fail to consider declines in the business activity.

Answer:  A

Terms:  Comparison of client data with similar prior-period data

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

11) Which of the following is accurate regarding the comparison of client data?

  1. A) Since budgets are only projections, auditors can ignore the differences between budgeted and actual results.
  2. B) One approach to overcome the limitations of industry averages is to compare the client to one or more benchmark firms in the industry.
  3. C) It is impractical to relate one account balance to another balance sheet or income statement account.
  4. D) it is extremely difficult to get industry data for comparative purposes.

Answer:  B

Terms:  Analytical analysis; comparison of client and industry data

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

12) State the three phases of the audit where analytical procedures can be performed and describe the specific procedures performed in each phase.

Answer:  Analytical procedures: can be performed during the following audit phases:

  • Planning phase — Auditing procedures are required during this phase. They are performed as part of the risk assessment procedures to understand the client’s business and to assist in determining the nature, extent, and timing of audit procedures.
  • Testing phase — Analytical procedures done during this phase are substantive tests in support of account balances. These procedures are often done in conjunction with other audit procedures.
  • Completion phase — Analytical procedures are required to be performed during this phase. Such tests serve as a final review for material misstatements or financial problems and help the auditor take a final “objective look” at the audited financial statements.

Terms:  Purposes of analytical procedures

Diff:  Challenging

Objective:  LO 7-5

AACSB:  Reflective thinking

 

13) Substantive analytical procedures performed in all phases of the audit generally use aggregate data to help understand where misstatements are more likely to occur.

Answer:  FALSE

Terms:  Analytical procedures; Substantive tests

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

14) There has been an increased emphasis on the use of analytical procedures during an audit.

Answer:  TRUE

Terms:  Analytical procedures

Diff:  Easy

Objective:  LO 7-5

AACSB:  Reflective thinking

 

15) The usefulness of analytical procedures as audit evidence depends significantly on appropriate comparison data.

Answer:  TRUE

Terms:  Analytical procedures

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

16) The most important benefits of industry comparisons are to aid in understanding the client’s business and as an indication of the likelihood of financial failure.

Answer:  TRUE

Terms:  Analytical analysis; comparison of client and industry data

Diff:  Easy

Objective:  LO 7-5

AACSB:  Reflective thinking

 

17) One substantive analytical procedure involves the auditor calculating an expected balance for an account and then comparing it to the actual account balance.

Answer:  TRUE

Terms:  Substantive analytical procedures

Diff:  Moderate

Objective:  LO 7-5

AACSB:  Reflective thinking

 

7.6   Learning Objective 7-6

 

1) Financial ratios

  1. A) are used during the planning and final review phases of the audit.
  2. B) can be linked to the trial balance so that calculations are automatically updated as adjustments are made.
  3. C) should be compared to previous years and industry averages.
  4. D) all of the above

Answer:  D

Terms:  Use of financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

2) Which of the following ratios is not a measure of a company’s short-term debt paying ability?

  1. A) accounts receivable turnover
  2. B) cash ratio
  3. C) current ratio
  4. D) quick ratio

Answer:  A

Terms:  Financial ratios; short-term debt paying ability

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

3) Which financial ratio is computed by dividing current assets by current liabilities?

  1. A) quick ratio
  2. B) debt to equity
  3. C) accounts receivable turnover
  4. D) current ratio

Answer:  D

Terms:  Financial ratios; short-term debt paying ability

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Analytic thinking

 

 

4) Which account is used in the current ratio but not the quick ratio?

  1. A) marketable securities
  2. B) accounts payable
  3. C) accounts receivable
  4. D) inventory

Answer:  D

Terms:  Financial ratios; short-term debt paying ability

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

5) To determine accounts receivable turnover, net sales is divided by

  1. A) beginning net accounts receivable.
  2. B) average gross receivables.
  3. C) cost of goods sold.
  4. D) 365 days.

Answer:  B

Terms:  Common financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Analytic thinking

6) A company’s long-term solvency

  1. A) can be measured by the gross profit percentage.
  2. B) depends on the success of its operations and on its ability to raise capital for expansion.
  3. C) can be measured by the days to collect receivables ratio.
  4. D) depends on its ability to generate cash for the payment of dividends.

Answer:  B

Terms:  Common financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

 

7) Which of the following is an accurate statement regarding a company’s ability to meet its long-term debt obligations?

  1. A) If the debt-to-equity ratio is too high, it may indicate that the company has used up its borrowing capacity.
  2. B) If the debt-to-equity ratio is too high, it may mean that available leverage is not being used to the owners’ benefit.
  3. C) The times interest earned ratio indicates if a company can make its principal and interest payments.
  4. D) The key ratios that are used to measure a long-term solvency are debt to equity, return on assets, and times interest earned.

Answer:  A

Terms:  Common financial ratios; long-term debt obligations

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

8) Which ratio do auditors find useful for assessing misstatements in sales, cost of goods sold, accounts receivable, and inventory?

  1. A) earnings per share
  2. B) profit margin
  3. C) gross profit percent
  4. D) current ratio

Answer:  C

Terms:  Common financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

9) Which ratio is computed by dividing operating income by net sales?

  1. A) gross profit percent
  2. B) profit margin
  3. C) return on sales
  4. D) return on assets

Answer:  B

Terms:  Common financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

10) Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of the company’s credit policies.

Answer:  FALSE

Terms:  Common financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

11) Auditors use trends in the inventory turnover ratio to identify potential inventory obsolescence.

Answer:  TRUE

Terms:  Common financial ratios

Diff:  Easy

Objective:  LO 7-6

AACSB:  Reflective thinking

 

12) The most widely used profitability ratio is the gross profit percent.

Answer:  FALSE

Terms:  Common financial ratios

Diff:  Moderate

Objective:  LO 7-6

AACSB:  Reflective thinking

 

7.7   Learning Objective 7-7

 

1) Which of the following best describes one of the primary objectives of audit documentation?

  1. A) defend against claims of a deficient audit
  2. B) provide a basis for reviewing the work of subordinates
  3. C) provide reasonable assurance that the audit was conducted in accordance with auditing standards
  4. D) provide additional support of recorded amounts to the client

Answer:  C

Terms:  Primary objective of audit documentation

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

 

2) Audit documents

  1. A) are kept by the client for easy reference for their accounting staff.
  2. B) should be considered as a substitute for the clients accounting records.
  3. C) are designed to facilitate the review and supervision of the work performed by the audit team by a reviewing partner.
  4. D) prepared during the engagement are the property of the client once the audit bill is paid.

Answer:  C

Terms:  Audit documentation

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

 

3) Audit documentation

  1. A) should identify the items tested when the audit procedures involve sampling of transactions or balances.
  2. B) does not aid in the preparation of the tax return since accounting and tax rules differ.
  3. C) is another term for the audit program.
  4. D) should not be given to anyone outside the audit firm, even if a subpoena has been issued.

Answer:  A

Terms:  Audit documentation

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

 

4) Audit documentation of the evidence gathered by the auditor should meet which of the following criteria?

  1. A) Workpapers are prepared in sufficient detail so that they can be given to the client for future reference.
  2. B) The content is sufficient to provide support for the auditor’s opinion, including the auditor’s representation as to compliance with auditing standards.
  3. C) Audit evidence is principally gathered to determine if the client’s financial statements, as prepared by management, can be relied upon to make managerial decisions about the firm.
  4. D) Audit evidence as displayed in the workpapers is primarily performed to protect the auditing firm in the case of a lawsuit by investors.

Answer:  B

Terms:  Audit evidence gathered by auditors meets which criteria

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

 

5) Audit documents are the joint property of the auditor and the audit client.

Answer:  FALSE

Terms:  Audit documentation

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

 

6) Auditing standards require that records for audits of private companies be retained for a minimum of seven years.

Answer:  FALSE

Terms:  Audit documentation; retention

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

 

 

7) The SEC requires the auditors of public companies to retain e-mail correspondence related to the audit.

Answer:  TRUE

Terms:  Audit documentation; retention

Diff:  Moderate

Objective:  LO 7-7

AACSB:  Reflective thinking

7.8   Learning Objective 7-8

 

1) When preparing and organizing audit files,

  1. A) the rules established by the SEC and PCAOB must be followed.
  2. B) a lead schedule contains the detailed accounts from the general ledger making up the line item on the trial balance.
  3. C) a working trial balance is considered part of the permanent file.
  4. D) the audit program is not part of the audit files.

Answer:  B

Terms:  Audit files

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

 

2) Audit documentation should possess certain characteristics. Which of the following is true regarding those characteristics?

  1. A)
Audit documentation should be indexed and cross-referenced Audit documentation should be organized to benefit the client’s staff
Yes Yes

 

  1. B)
Audit documentation should be indexed and cross-referenced Audit documentation should be organized to benefit the client’s staff
No No

 

  1. C)
Audit documentation should be indexed and cross-referenced Audit documentation should be organized to benefit the client’s staff
Yes No

 

  1. D)
Audit documentation should be indexed and cross-referenced Audit documentation should be organized to benefit the client’s staff
No Yes

 

Answer:  C

Terms:  Audit documentation characteristics

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

3) The permanent audit file would usually include the

  1. A) client’s working trial balance.
  2. B) summary of the risk assessment procedures performed.
  3. C) organizational chart of the company’s employees.
  4. D) summary of the auditors test of controls for the current years audit.

Answer:  C

Terms:  Permanent file

Diff:  Challenging

Objective:  LO 7-8

AACSB:  Reflective thinking

 

4) The permanent files included as part of audit documentation do not normally include

  1. A) a copy of the current and prior years’ audit programs.
  2. B) copies of articles of incorporation, bylaws and contracts.
  3. C) information related to the understanding of internal control.
  4. D) results of analytical procedures from prior years.

Answer:  A

Terms:  Permanent file

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

5) Supporting schedules

  1. A) must be prepared by the auditor.
  2. B) make up the largest portion of audit documentation.
  3. C) must consist of either reconciliation of amounts or substantive analytical procedures.
  4. D) all of the above

Answer:  B

Terms:  Audit documentation; supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

6) What type of supporting schedule is designed to show detailed tests performed, does not tie in to the general ledger, but must state a positive or negative conclusion about the objective of the test?

  1. A) outside documentation
  2. B) reconciliation of amounts
  3. C) examination of supporting documents
  4. D) substantive analytical procedures

Answer:  C

Terms:  Audit documentation; supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

7) A(n) ________ is a supporting schedule that supports a specific amount and is normally expected to tie the amount recorded in the client’s records to another source of information.

  1. A) reconciliation of amounts
  2. B) analysis
  3. C) summary of procedures
  4. D) informational document

Answer:  A

Terms:  Audit documentation; supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

8) Which type of supporting schedule is designed to show the activity in a general ledger account during the entire period under audit?

  1. A) trial balance
  2. B) reconciliation of amounts
  3. C) summary of procedures
  4. D) analysis

Answer:  D

Terms:  Audit documentation; supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

9) When determining sufficient and appropriate audit evidence in order to form an opinion on the client’s financial statements the auditor compiles audit documentation to support the opinion. The largest portion of audit documentation will include detailed supporting schedules prepared by the client or the auditor in support of specific accounts on the financial statements. Two types of supporting schedules are analysis and reconciliation of amounts. Discuss those two schedules and give an example for each schedule.

Answer:  Analysis: designed to show the activity in a general ledger account during the entire period under audit, tying together the beginning and ending balances. Examples: marketable securities, property, plant and equipment, long-term debt, equity accounts.

 

Reconciliation of amounts: Supports a specific amount and is normally expected to tie the amount recorded in the client’s records to another source of information. Examples: the reconciliation of cash balances with bank statements, the reconciliation of subsidiary accounts receivable balances with confirmations from customers, and the reconciliation of accounts payable balances with vendors’ statements.

 

(Note : students were only required to give one example)

Terms:  Audit documentation; supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

 

10) The basis for preparing financial statements for companies is the general ledger. As soon as possible the auditor obtains the general ledger accounts of the client and prepares a working trial balance. Discuss the audit documentation in the current file that relates to the working trial balance. Include a description of lead and support schedules in your answer.

Answer:  Lead Schedules–each line item on the working trial balance is supported by a lead schedule, containing the detailed accounts from the general ledger making up the line item in the working trial balance

 

Support Schedules–each detailed account of the lead schedule is supported by proper schedules supporting the audit work performed and the conclusions reached by the auditors

Terms:  Supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

11) Auditors use tick marks, which are symbols adjacent to the detail on the body of the schedule.

Answer:  TRUE

Terms:  Audit documentation; tick marks

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

12) An example of a supporting schedule is a reconciliation of amounts, which consists of the details that make up a year-end balance.

Answer:  FALSE

Terms:  Supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

13) Since confirmation replies and copies of client agreements are not considered schedules in the usual sense, they are not indexed and filed.

Answer:  FALSE

Terms:  Audit documentation; supporting schedules

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

14) An auditor can use engagement management software to facilitate tracking audit progress.

Answer:  TRUE

Terms:  Technology and audit evidence

Diff:  Moderate

Objective:  LO 7-8

AACSB:  Reflective thinking

 

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