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2. The auditor gathers audit evidence to test management’s assertions.
TRUE
3. Management assertions fall into four main categories.
FALSE
4. The classification assertion refers to transactions and events being recorded in the correct accounting period.
FALSE
5. The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.
TRUE
7. Audit procedures are designed to test management assertions.
TRUE
8. The relevance of audit evidence or specific audit procedures depends on the assertion being tested.
TRUE
12. Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion?
A. Auditor judgment.
B. Materiality.
C. Relative risk.
D. Reasonable assurance.
A
13. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must
A. Be well documented and cross-referenced in the audit documents.
B. Be based on sources that are considered reliable.
C. Bear a direct relationship to the audit assertion.
D. Be persuasive enough to enable the auditor to form an opinion.
D
14. Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity’s balance sheet?
A. Assertions about classes of transactions and events.
B. Assertions about account balances at the period end.
C. Assertions about presentation and disclosure.
D. None of the above.
C
21. In designing written audit programs, an auditor should plan specific audit procedures to test
A. Timing of audit procedures.
B. Cost-benefit of gathering evidence.
C. Selected audit techniques.
D. Management assertions.
D
26. Of the following, which is the least persuasive type of audit evidence?
A. Documents mailed by outsiders to the auditor.
B. Correspondence between the auditor and third party vendors.
C. Copies of client sales invoices inspected by the auditor.
D. Computations made by the auditor.
C
28. Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor’s working trial balance?
A. Account analyses.
B. Supporting schedules.
C. Control accounts.
D. Lead schedules.
D
29. The permanent (continuing) file of an auditor’s working papers most likely would include copies of the
A. Bank statements.
B. Debt agreements.
C. Lead schedules.
D. Attorney’s letters.
B
31. Audit documentation prepared on audits of public clients is the property of the
A. Shareholders.
B. Auditor.
C. Management of the entity being audited.
D. SEC.
B
33. You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Valuation or allocation.
C
34. You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Accuracy.
C
36. Which of the following best describes the primary purpose of audit procedures?
A. To detect all errors or fraudulent activities.
B. To comply with generally accepted accounting principles.
C. To gather corroborative evidence about management’s assertions.
D. To verify the accuracy of the balance sheet account balances.
C
37. Procedures specifically outlined in an audit program are designed primarily to
A. Assess risk for planning purposes.
B. Detect all errors or fraudulent activities.
C. Test internal control systems.
D. Gather evidence about management’s assertions.
D
39. Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the:
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Low inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.
A
40. Of the following, the most reliable type of evidence typically is:
A. Confirmation.
B. Inspection of records and documents.
C. Reperformance.
D. Observation.
C
41. Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable audit evidence.
B. To be reliable, audit evidence should be convincing rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control system provides more reliable audit evidence.
D
42. Which of the following types of documentary evidence should the auditor consider to be the most reliable?
A. A sales invoice issued by the client and supported by a delivery receipt from an outside trucker.
B. Confirmation of an account payable balance mailed by and returned directly to the auditor.
C. A check issued by the company and bearing the payee’s endorsement that is included with the bank statement mailed directly to the auditor.
D. A working paper prepared by the client’s controller and reviewed by the client’s treasurer.
B
44. Which of the following statements is generally correct about the appropriateness of audit evidence?
A. The more effective the internal control, the more assurance it provides about the reliability of the accounting data and financial statements.
B. Appropriateness of audit evidence refers to the amount of corroborative evidence obtained.
C. Information obtained indirectly from independent outside sources is more persuasive than the auditor’s direct personal knowledge obtained through observation and inspection.
D. Appropriateness of audit evidence refers only to audit evidence obtained from outside the entity.
A
46. Following are several statements regarding accounting records or audit documentation. Which of the statements is correct?
A. Accounting records belong to the client.
B. Documentation of an auditor’s understanding of client’s internal control system is not necessary.
C. Audit documents may be regarded as a substitute for the client’s accounting records.
D. The independent auditor may discard audit documents after two years.
A
47. Audit documents record the results of the auditor’s evidence-gathering procedures. When preparing audit documents, the auditor should remember that
A. Audit documents should be kept on the client’s premises so that the client can have access to them for reference purposes.
B. Audit documents should be the primary support for the financial statements being examined.
C. Audit documents should be considered as a substitute for the client’s accounting records.
D. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement.
D
50. Audit documentation
A. Must be in electronic form.
B. Must be in paper form only.
C. Is not required, but is strongly recommended.
D. May be in paper, electronic, or some other form.
D
51. Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company’s primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Observation.
B
54. The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning audit evidence?
A. “I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined.”
B. “I would not undertake that procedure because at best the results would only be persuasive and I’m looking for convincing evidence.”
C. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.”
D. “I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it.
B
55. Which of the following statements concerning audit evidence is correct?
A. Appropriate evidence supporting management’s assertions should be convincing rather than persuasive.
B. Effective internal controls contribute little to the reliability of the evidence created within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
D
56. The permanent audit file usually includes
A. Working trial balance.
B. Organizational chart.
C. Audit plan.
D. Audit programs.
B
58. All audit documentation should have a heading, which includes
A. Name of the client.
B. Title of the working paper.
C. Client’s year-end date.
D. All of the above.
D
59. The audit working papers belong to
A. The client.
B. The government.
C. The audit firm.
D. They are public record documents.
C
61. An auditor’s decision either to apply analytical procedures as substantive procedures or to perform tests of transactions and account balances usually is determined by
A. Availability of data aggregated at a high level.
B. Relative effectiveness and efficiency of the tests.
C. Timing of tests performed after the balance sheet date.
D. Auditor’s familiarity with industry trends.
B
65. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that
A. Fraud exists within the relevant accounts.
B. Internal control activities are not operating effectively.
C. Additional tests of details are required.
D. The communication with the audit committee should be revised.
C
67. Analytical procedures may be classified as being primarily which of the following?
A. Tests of controls.
B. Substantive procedures.
C. Tests of ratios.
D. Detailed tests of balances.
B
77. An auditor’s analytical procedures performed during the overall review stage indicated that the client’s accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?
A. The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
B. Twice as many accounts receivable were written off in the prior year than in the current year.
C. A greater percentage of accounts receivable were currently listed in the “more than 90 days overdue” category than in the prior year.
D. The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
D
78. Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?
A. Earnings per share.
B. Return on total assets before interest and taxes.
C. Accounts receivable turnover.
D. Operating cycle.
A
79. Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
A. Quick assets divided by accounts payable.
B. Accounts receivable divided by inventory.
C. Interest payable divided by interest receivable.
D. Total debt divided by total assets.
D
11. A confirmation is used to
A. Verify the inventory count is correct.
B. Verify that a control is being observed.
C. Verify a representation from a third party.
D. Verify that a specific trend is correct.
C
15. In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management’s assertions about classes of transactions and events, and specifically, which assertion?
A. Occurrence.
B. Cutoff.
C. Authorization.
D. Classification.
A
16. Which assertions may be tested for the “account balances” category of management assertions?
A. Existence, accuracy, rights and obligations, completeness.
B. Existence, rights and obligations, completeness, valuation and allocation.
C. Occurrence, rights and obligations, completeness, valuation and allocation.
D. Occurrence, accuracy, rights and obligations, completeness.
B
17. Which assertions may be tested for the “transactions and events” category of management assertions?
A. Existence, completeness, rights and obligations, accuracy, cutoff and classification.
B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification.
C. Occurrence, completeness, authorization, accuracy, cutoff and classification.
D. Existence, rights and obligations, accuracy, authorization, and completeness.
C
18. Which assertions may be tested for the “presentation and disclosure” category of management assertions?
A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation.
B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification.
C. Occurrence, completeness, classification and understandability, cutoff and classification.
D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.
D
27. The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents’
A. Format be neat and orderly and include both a permanent file and a general file.
B. Content be sufficient to provide support for the auditor’s report, including the auditor’s representation as to compliance with auditing standards.
C. Ownership be determined by the legal statutes of the state where the auditor practices.
D. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers, and partners.
B
35. Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?
A. Compare a sample of shipping documents to related sales invoices.
B. Observe the client’s distribution of payroll checks.
C. Confirm a sample of recorded receivables by direct communication with the debtors.
D. Review standard bank confirmations for indications of kiting.
A
49. In creating lead schedules for an audit engagement, what client information is needed to begin?
A. Interim financial information, such as third quarter sales, net income, and inventory and receivables balances.
B. Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year.
C. General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.
D. Adjusting entry information, such as deferrals and accruals and reclassification journal entries
C
53. You are concerned with unrecorded transactions in the purchasing cycle. Which audit procedure are you most likely to use when auditing purchases?
A. Vouching transactions in accounting records to vendor invoices.
B. Tracing vendor invoices to accounting records.
C. Recalculation of vendor invoice amounts.
D. Confirmation of customer accounts.
B
10. The sufficiency of evidence refers to the quality of audit evidence.
FALSE
19. Tracing is used primarily to test which of the following assertions about classes of transactions?
A. Occurrence.
B. Completeness.
C. Cutoff.
D. Classification.
B
20. Vouching is used primarily to test which of the following assertions about classes of transaction?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Classification.
A
22. Footing is an example of
A. Recalculation.
B. Confirmation.
C. Inquiries.
D. Analytical procedures
A
23. In determining whether transactions have been recorded, the direction of the audit testing should start from the
A. General ledger balances.
B. Adjusted trial balance.
C. Original source documents.
D. General journal entries.
C
24. To test for unsupported entries in the ledger, the direction of audit testing should start from the
A. Ledger entries.
B. Journal entries.
C. Externally generated documents.
D. Original source documents.
A
25. Which of the following presumptions does not relate to the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements.
B. An auditor’s opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.
B
27. The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents’
A. Format be neat and orderly and include both a permanent file and a general file.
B. Content be sufficient to provide support for the auditor’s report, including the auditor’s representation as to compliance with auditing standards.
C. Ownership be determined by the legal statutes of the state where the auditor practices.
D. Preparation be the responsibility of assistants whose work is reviewed by seniors, managers, and partners.
B
30. An example of audit evidence with a medium level of reliability is
A. Scanning.
B. Recalculation.
C. Observation.
D. All of the above
A
32. All of the following are typically in the current file except:
A. Adjusting journal entries.
B. Copies of the audit report.
C. Chart of accounts.
D. Lead schedules.
C
38. Which statement concerning audit evidence is not valid?
A. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited.
B. The auditor performs tests to collect convincing evidence that the financial statements are not misstated.
C. The auditor weighs the cost of obtaining evidence with its usefulness.
D. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected.
B
43. Which of the following is the least persuasive documentation in support of an auditor’s opinion?
A. Schedules of details of physical inventory counts conducted by the client.
B. Notation of auditor’s inferences drawn from ratios and trends.
C. Notation of appraisers’ conclusions documented in the auditor’s working papers.
D. Lists of negative confirmation requests for which no response was received by the auditor.
A
45. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered client purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client responses to auditor inquiries.
C
48. Audit documents that record the procedures used by the auditor to gather evidence should be
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the accounting records and the financial statements.
C. Designed in an orderly fashion to facilitate the review of audit work by the senior, manager, and partner on the engagement.
D. Retained until the audited entity ceases to be a client.
C
52. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.
B
57. The current audit file usually includes
A. Working trial balance.
B. Organizational chart.
C. Accounting manual.
D. Copies of important contracts.
A
60. Which of the following are ordinarily designed to detect possible material monetary errors in the financial statements?
A. Tests of controls.
B. Analytical procedures.
C. Computer controls.
D. Post-audit review of audit documents.
B
63. Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
A. Turnover of personnel in the accounting department.
B. Objectivity of audit committee members.
C. Square footage of selling space.
D. Management’s plans to repurchase stock.
C
66. Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial information.
B. Comparison of the financial information with similar information regarding the industry in which the entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.
C
68. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of
A. Tests of transactions and balances.
B. A preliminary review of internal controls.
C. Specialized audit programs.
D. Analytical procedures.
D
69. An example of an analytical procedure is the comparison of
A. Financial information with similar information regarding the industry in which the entity operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual population.
D. EDP generated data with similar data generated by a manual accounting system.
A
70. Analytical procedures used in planning an audit should focus on identifying
A. Material weaknesses in internal control.
B. The predictability of financial data from individual transactions.
C. The various assertions that are embodied in the financial statements.
D. Areas that may represent specific risks relevant to the audit.
D
71. Analytical procedures are
A. Never required.
B. Required for planning, substantive testing, and overall review of the financial statements.
C. Required for planning and overall review of the financial statements.
D. Required during planning only.
C
72. As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should
A. Express an opinion that is qualified due to the inability of the client company to continue as a going concern.
B. Evaluate management’s performance in causing this decline.
C. Require footnote disclosure.
D. Consider the possibility of an error in the financial statements.
D
73. The auditor generally gives most emphasis to ratio and trend analysis in the examination of the
A. Statement of Changes in Stockholders’ Equity and Retained Earnings.
B. Income Statement.
C. Balance Sheet.
D. Statement of Cash Flows.
B
74. The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to provide an acceptable explanation, the auditor should
A. Consider the matter a scope limitation.
B. Perform additional audit procedures to investigate the matter further.
C. Intensify the examination with the expectation of detecting management fraud.
D. Withdraw from the engagement.
B
75. Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive procedures?
A. Relationships involving balance sheet accounts.
B. Transactions subject to management discretion.
C. Relationships involving income statement accounts.
D. Data subject to audit testing in the prior year.
C
76. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit. Information to develop this estimate can be obtained from all of the following except:
A. Tracing transactions through the system to determine whether procedures are being applied as prescribed.
B. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budgets and forecasts) and similar data for the industry in which the entity operates.
C. Study of the relationships of elements of financial data that would be expected to conform to a predictable pattern based upon the entity’s experience.
D. Study of the relationships of financial data with relevant nonfinancial data.
A