Audit Exam 1 (Ch 6-9)

Which of the following is not a characteristic of the reliability of evidence? A) effectiveness of client internal controls B) education of auditor C) independence of information provider D) timeliness

B) education of auditor

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is A) audit risk. B) control risk. C) inherent risk. D) planned detection risk.

D) planned detection risk.

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 1. a calculation done by the auditor independent of the client

b. compute

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 Foot the purchases journal and trace the totals to the related general ledger accounts. (1) ________. (2) ________.

1. (1) D (2) X

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, performance materiality, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged. 1. an increase in acceptable audit risk ________ 2. an increase in inherent risk ________ 3. a decrease in control risk ________ 4. an increase in planned detection risk ________ 5. an increase in performance materiality ________

1. decrease 2. increase 3. decrease 4. decrease 5. decrease

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 2. Recompute the cash discounts taken by the client. (1) ________. (2) ________.

2. (1) C (2) X

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 3. Compare dates on cancelled checks with the bank cancellation date. (1) ________. (2) ________.

3. (1) F (2) Z

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 4. Trace from a sample of cancelled checks to the cash disbursements journal. (1) ________. (2) ________.

4. (1) B (2) W

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 5. Examine supporting documentation for a sample of transactions for authorized payee and amount and to determine services or goods were received. (1) ________. (2) ________.

5. (1) A (2) V

When can audit procedures be performed? A) Prior to the fiscal year-end of the client Yes Subsequent to the fiscal year-end of the client Yes B) Prior to the fiscal year-end of the client No Subsequent to the fiscal year-end of the client No C) Prior to the fiscal year-end of the client Yes Subsequent to the fiscal year-end of the client No D) Prior to the fiscal year-end of the client No Subsequent to the fiscal year-end of the client Yes

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

) ________ is the auditor's examination of the client's documents and records to substantiate that the information is included in the financial statements. A) Inspection B) Recalculation C) Observation D) Verification

A) Inspection

Which of the following would not increase the risks of material misstatement at the overall financial statement level? A) effective oversight by the board of directors B) deficiencies in management's integrity C) inadequate accounting systems D) all of the above

A) effective oversight by the board of directors

When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should: A) investgate the possibility the client may have made an error in their cost of goods sold computation. B) assist management in developing greater cost efficiencies in their product line. C) prepare a going concern opinion for the client. D) advise the client to have extensive disclosure to alleviate investor concerns.

A) investgate the possibility the client may have made an error in their cost of goods sold computation.

Auditing standards require that an audit be designed to provide reasonable assurance of detecting: A) material errors in the financial statements. B) fraud in the financial statements. C) material errors and fraud in the financial statements. D) inadequate disclosure in the notes to the financial statements.

A) material errors in the financial statements.

As acceptable audit risk is decreased, the likely cost of conducting an audit increases. A) True B) False

A. true

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.

Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each account balance? A) The specific audit objectives are applicable to every account balance on the financial statements. B) The general audit objectives are applicable to every account balance on the financial statements. C) The general audit objectives are stated in terms tailored to the engagement. D) For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

B) The general audit objectives are applicable to every account balance on the financial statements.

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the: A) inherent risk. B) acceptable audit risk. C) statistical risk. D) financial risk.

B) acceptable audit risk.

"The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered." This is an example of: A) unprofessional behavior. B) an attitude of professional skepticism. C) due diligence. D) a rule in the AICPA's Code of Professional Conduct.

B) an attitude of professional skepticism.

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? A) physical examination B) analytical procedures C) observation D) inquiry

B) analytical procedures

Inherent risk and control risk A) are inversely related to each other. B) are inversely related to detection risk. C) are directly related to detection risk. D) are directly related to audit risk.

B) are inversely related to detection risk.

When the auditor uses tracing as an audit procedure for tests of transactions, she is primarily concerned with which audit objective? A) occurrence B) completeness C) cutoff D) classification

B) completeness

When the auditor knows that an illegal act has occurred, the auditor must: A) report it to the proper governmental authorities. B) consider the effects on the financial statements, including the adequacy of disclosure. C) withdraw from the engagement. D) issue an adverse opinion.

B) consider the effects on the financial statements, including the adequacy of disclosure.

A written understanding detailing what the auditors will do in determining if the financial statements are fair representations of the company's financial statements and what the auditor expects from the client in performing an audit will normally be expressed in the: A) management letter requested by the auditor. B) engagement letter. C) Audit Plan. D) Audit Strategy for the client.

B) engagement letter.

The measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as A) audit risk. B) inherent risk. C) sampling risk. D) detection risk.

B) inherent risk.

Acceptable audit risk is a measure of the auditor's willingness to accept that the financial statements do not contain material misstatements after the audit is completed and a qualified audit report has been issued. A) True B) False

B. false

4) Which of the following statements is true of a public company's financial statements? A) Sarbanes-Oxley requires the CEO only to certify the financial statements. B) Sarbanes-Oxley requires the CFO only to certify the financial statements. C) Sarbanes-Oxley requires the CEO and CFO to certify the financial statements. D) Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.

C) Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.

Which of the following is an accurate statement regarding audit evidence? A) Responses to the auditor's questions by client employees is considered highly persuasive evidence. B) Audit evidence should provide an absolute level of assurance. C) The auditor uses evidence to determine whether the statements are fairly presented. D) All evidence must be highly persuasive.

C) The auditor uses evidence to determine whether the statements are fairly presented.

The auditor is determining that the recorded sales are for the amount of goods shipped are correctly billed and recorded. She is gathering evidence about which transaction related audit objective? A) existence B) completeness C) accuracy D) cut-off

C) accuracy

Two determinants of the persuasiveness of evidence are A) competence and sufficiency. B) relevance and reliability. C) appropriateness and sufficiency. D) independence and effectiveness.

C) appropriateness and sufficiency.

Which of the following would most likely be deemed a direct-effect illegal act? A) violation of federal employment laws B) violation of federal environmental regulations C) violation of federal income tax laws D) violation of civil rights laws

C) violation of federal income tax laws

When inherent risk is high, there will need to be: A) A lower assessment of audit risk Yes More evidence accumulated by the auditor Yes B) A lower assessment of audit risk No More evidence accumulated by the auditor No C) A lower assessment of audit risk yes More evidence accumulated by the auditor No D) A lower assessment of audit risk No More evidence accumulated by the auditor Yes

D) A lower assessment of audit risk No More evidence accumulated by the auditor Yes

Which of the following would not be classified as an analytical procedure? A) Benchmarking the company's profitability ratios against others in the industry. B) Variance analysis of actual versus budgeted amounts for production. C) Reperforming the client's depreciation expense using the client's accounting policies for capital expenditures made during the year. D) Reconciling fixed asset dispositions with the fixed asset ledger .

D) Reconciling fixed asset dispositions with the fixed asset ledger .

Auditors accumulate evidence to: A) defend themselves in the event of a lawsuit. B) justify the conclusions they have otherwise reached. C) satisfy the requirements of the Securities Acts of 1933 and 1934. D) enable them to reach conclusions about the fairness of the financial statements.

D) enable them to reach conclusions about the fairness of the financial statements.

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called: A) control risk. B) acceptable audit risk. C) statistical risk. D) inherent risk.

D) inherent risk.

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 4. a use of the senses to assess certain activities

J. observe

Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit. Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit.

Planning — The primary purposes are to understand the client's business and industry and indicate areas of possible misstatements. The secondary purposes are to assess going concern and reduce the extent of detailed tests. • Testing — The primary purpose is to reduce the extent of detailed tests, while the secondary purpose is to indicate areas of possible misstatements. • Completion —The primary purpose is to indicate areas of possible misstatements, while the secondary purpose is to assess going concern. Terms: Primary and secondary purposes of analytical procedures in planning, testing, and completion phases of audit

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare _______ 2. addition of a column of numbers to determine if the total is the same as the client's

a. foot

a measure of how much risk the auditor is willing to take that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued

acceptable audit risk

This term is synonymous with acceptable audit risk.

audit assurance

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 6. a less detailed examination of a document or record to determine if there is something unusual warranting further investigation

c. scan

a measure of the auditor's assessment of the likelihood that misstatements exceeding a performance materiality in a segment will not be prevented or detected by the client's internal controls

control risk

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 7. obtaining information from the client in response to specific questions

d. inquire

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 8. a determination of assets on hand at a given time

e. count

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare _______ 5. following details of transactions from original documents to journals

f. trace

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 9. an examination of written information to determine facts pertinent to the audit

h. read

a measure of the auditor's assessment of the likelihood that there are material misstatements before considering the effectiveness of internal control

inherent risk

Match nine of the terms (a-k) with the definitions provided below (1-9): a. foot b. compute c. scan d. inquire e. count f. trace g. reperform h. read i. examine j. observe k. compare ________ 3. a comparison of information in two different locations

k. compare

the magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person would have been changed

materiality

the materiality allocated to any given account balance

performance materiality level

a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding the performance materiality amount, should such misstatements exist

planned detection risk

the maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users

preliminary judgement about materiality