Auditing and Assurance Services Chapter 3

True or false: Auditors should resist using analytical procedures during the substantive testing of balances.

False

PCAOB regulations require that all documentation be finalized within ___________ days of the audit report's release date. a. 45 b. 90 c. 60 d. 30

a. 45

Relevant considerations when determining materiality include: a. amounts that allow the company to meet earnings expectations b. matters surrounded by uncertainty of future outcomes c. the likelihood of being selected for PCAOB inspection d. amounts that turn a net profit into a net loss

a. amounts that allow the company to meet earnings expectations b. matters surrounded by uncertainty of future outcomes c. the likelihood of being selected for PCAOB inspection

Documents prepared and processed by the client: a. require additional audit testing to be considered reliable b. are less reliable when prepared by the client and mailed to third parties c. include copies of insurance policies d. are referred to as internal evidence

a. require additional audit testing to be considered reliable d. are referred to as internal evidence

Assertions that can be tested by vouching include: a. valuation b. allocation c. occurrence d. completeness

a. valuation b. allocation c. occurrence

The basis to determine the nature, timing, and extent of internal control tests and substantive tests of account balances and disclosures is the: a. prior year's audit b. nature of the client's business c. risk assessment process d. number of management assertions

c. risk assessment process

The permanent files are also called _____________ _________________ files.

continuing audit

To simplify the audit plan, auditors typically group the accounts into _______________ which are sets of logically grouped accounts.

cycles

A summary of the accounts of components in an account group is called a(n) _______________ ________________.

lead schedule

Information is considered important or ______________ if it is likely to influence financial statement users' decisions.

material

Prior to relying on the work of internal auditors, external auditors should consider their ____________ and ______________.

objectivity; competence

An "eyes-open" approach of looking for anything unusual that can raise questions related to evidence that needs to be obtained is called ____________.

scanning

According to the professional standards, if there is a chance an account could contain a material misstatement, it should be identified as __________________.

significant

When an auditor/client relationship ends a(n) ______________ letter should be prepared that details the subject of future services and circumstances that caused the conflict.

termination

Auditors' shorthand for abbreviating comments about work performed are called audit or ______ ______.

tick marks

When auditors use sampling, performance materiality is reffered to as ________ __________.

tolerable misstatement

Selecting an item in the financial records and following the path back to the source document is referred to as _______________.

vouching

True or false: Client continuance decisions are generally very different that client acceptance decisions.

False

True or false: Evidence based on documents received directly from outside parties is only considered reliable if the documents include a signature, seal, engraving or other artistic attribute of formal authority.

False

True or false: The primary reason for engagement planning is to determine the number of hours that will be needed to adequately form an audit opinion.

False

True or false: One objective of a financial statement audit is to determine if, in all material respects, the entity being audited is reporting the one true net income.

False: a range of potential net income figures is allowable under both GAAP and IFRS.

External-internal documentary evidence means the documents were originally prepared by: a. an external third party, received by the client and passed on to the auditor b. an external third party, received by the auditor and passed on to the client for verification c. the auditor who sent it to a third party to be verified and returned directly to the auditor d. the client sent for verification to a third party who returned the document to the auditor

a. an external third party, received by the client and passed on to the auditor

Auditors spend a considerable amount of time on risk assessment at: a. both the financial statement and management assertion level b. the management assertion level only c. neither the financial statement nor management assertion level d. the financial statement level only

a. both the financial statement and management assertion level

Reperformance: a. can be completed for any client control procedure b. is similar to recalculation but more narrow in approach c. must be done manually d. is commonly used when completing internal control system walkthroughs

a. can be completed for any client control procedure d. is commonly used when completing internal control system walkthroughs

Reported net income under GAAP s not one "true" figure but a possible range of measure influenced by the choice of: a. classification of marketable securities b. estimating uncollectible accounts receivable or using direct write off of accounts c. depreciation methods d. fixed asset lives

a. classification of marketable securities c. depreciation methods d. fixed asset lives

Observation is commonly used as a test of: a. control b. substantive audit procedures c. ownership d. details

a. control

The audit planning process: a. details the nature, timing and extent of control and substantive tests designed to mitigate risk b. is prepared after procedures to assess the risk of material misstatement at the financial statement and assertion level have been completed c. includes the establishment of overall strategy

a. details the nature, timing and extent of control and substantive tests designed to mitigate risk c. includes the establishment of overall strategy

The audit team uses materiality as a guide: a. for making audit report decisions b. to planning substantive testing procedures c. for determining performance materiality d. to planning tests of controls

a. for making audit report decisions b. to planning substantive testing procedures c. for determining performance materiality

Inquiry: a. generally involves the collection of verbal evidence b. relates to evidence from independent parties only c. procedures are generally used in to final stages of the audit d. is never enough on its own to reach an audit conclusion

a. generally involves the collection of verbal evidence d. is never enough on its own to reach an audit conclusion

Time budgets: a. identify problem areas early in the engagement b. specific time by type of staff member c. are usually only prepared for year-end work d. are often based on prior years audits

a. identify problem areas early in the engagement b. specific time by type of staff member d. are often based on prior years audits

Documents prepared and processed by the client: a. include copies of sales invoices and receiving reports b. are more reliable when the client's internal control system is strong c. Is referred to as internal-external evidence d. become more reliable when mailed to third parties

a. include copies of sales invoices and receiving reports b. are more reliable when the client's internal control system is strong d. become more reliable when mailed to third parties

As a general rule, analytical procedures are ___________ detailed, document-oriented procedures. a. less costly than b. about the same cost as c. more costly than

a. less costly than

Audit documentation: a. may be in either electric or hard copy form b. provides the auditors' record of compliance with standards c. is legally owned by the client that was audited d. should contain support for the audit decision

a. may be in either electric or hard copy form b. provides the auditors' record of compliance with standards c. is legally owned by the client that was audited d. should contain support for the audit decision

IT auditors: a. may be needed to evaluate computerized processes b. are not part of the audit engagement team c. assist with understanding software packages d. provide specialized skills related to programming languages

a. may be needed to evaluate computerized processes c. assist with understanding software packages d. provide specialized skills related to programming languages

External auditors: a. may rely on some work completed by the internal audit department b. cannot delegate tasks that require professional judgement c. may delegate supervision of internal auditors to the manager of internal audit d. must review, evaluate and perform independent testing of the internal audit work

a. may rely on some work completed by the internal audit department b. cannot delegate tasks that require professional judgement d. must review, evaluate and perform independent testing of the internal audit work

An auditor set overall materiality at $60,000. During the audit, no individual material misstatements were discovered. However, four misstatements that are individually immaterial were found. As a result of these misstatements, net income increased by $70,000. The auditor: a. must factor in the probability that the aggregate of uncorrected and undetected misstatements could exceed overall materiality b. should conclude that the overall materiality threshold has been met, since all misstatements found were individually immaterial

a. must factor in the probability that the aggregate of uncorrected and undetected misstatements could exceed overall materiality

The SEC recommends auditors: a. not put too much reliance on quantitative benchmarks when assessing materiality b. set materiality levels based on the "rule of thumb" for the industry c. recognize that misstatement should be considered immaterial when they fall beneath a numerical threshold

a. not put too much reliance on quantitative benchmarks when assessing materiality

Computerized audit trails may: a. require the auditor to alter the nature of testing b. require the auditor to alter the extent of testing c. require the auditor to alter the timing of testing d. provide a permanent transaction trail useful for auditing purposes

a. require the auditor to alter the nature of testing c. require the auditor to alter the timing of testing

The nature and extent of work completed during engagement planning depends on the: a. size of the company being audited b. number of auditors assigned to the audit c. prior experience with the company being audited d. company's industry and complexity

a. size of the company being audited c. prior experiences with the company being audited d. company's industry and complexity

Favorable conclusions about the competence and objectivity of internal auditors allow external auditors to rely on the work of internal auditors related to: a. substantive testing of balances on the audit b. forming the audit decision c. assessing the reasonableness of the allowance for doubtful accounts d. testing the internal control system

a. substantive testing of balance on the audit d. testing the internal control system

A planning memorandum: a. summarizes all important planning information b. documents the audit team is following generally accepted accounting standards c. includes specific directions related to the audit d. can be used as an engagement letter

a. summarizes all important planning information c. includes specific directions related to the audit

Relevant considerations when determining materiality include: a. the auditors' legal liability b. whether or no the audit firm has chosen to provide the audit for PCAOB inspection c. political events in foreign countries d. how widely the financial statements will be used

a. the auditors' legal liability c. political events in foreign countries d. how widely the financial statements will be used

When a public company changes auditors: a. the board of directors must approve the change b. the former auditor must file Form 8-K explaining whether or not they agree with the change c. any pertinent disagreements with the former auditor must be disclosed d. documents filed regarding the change are available to the public

a. the board of directors must approve the change c. any pertinent disagreements with the former auditor must be disclosed d. documents filed regarding the change are available to the public

The objectivity of internal auditors is questionable when: a. they report to a line manager b. they are scheduled for promotion to areas under internal audit review c. divisional managers set their pay d. they report directly to the board of directors e. they report directly to the audit committee

a. they report to a line manager b. they are scheduled for promotion to areas under internal audit review c. divisional mangers set their pay

Confirmation can provide evidence regarding: a. valuation b. cutoff c. rights and obligations d. completeness e. existence

a. valuation b. cutoff c. rights and obligations e. existence

Procedures performed shortly before and after the financial statement date is referred to as __________ audit work. a. year-end b. standard c. interim d. seasonal

a. year-end

When an auditor compares his or her expectation to a recorded balance, __________________ __________________ are being performed.

analytical procedures

Persons skilled in areas outside of accounting are sometimes used to acquire information. Such individuals are called ___________ _____________ and may include actuaries, attorneys, and environmental engineers.

audit specialists

A chain of evidence provided through coding, cross-references, and documentation connecting account balances and other summary results with the original transaction source document is a(n) _____________ ______________.

audit trail

Which of the following statements is correct? a. All inaccuracies in financial statements affect user decisions b. If time is taken to find all inaccuracies, the issuing of financial statements will be delayed c. The cost of finding and correcting all misstatements is worth the benefit derived from the corrections.

b. If time is taken to find all inaccuracies, the issuing of financial statements will be delayed

A computerized environment: a. increases control risks b. can enhance the system of internal controls c. helps prevent unauthorized access to data and information d. reduces the potential for observing errors or fraud

b. can enhance the system of internal controls d. reduces the potential for observing errors or fraud

A lack of auditor independence: a. requires an adverse opinion b. can result in disciplinary actions c. can lead to investor and client lawsuits

b. can result in disciplinary actions c. can lead to investor and client lawsuits

Obtaining evidence about their education, experience, and certifications, along with a review of department policies and procedures enables external auditors to investigate internal auditors': a. objectivity b. competence c. independence

b. competence

The goals of audit planning are to: a. determine the feasibility of the audit b. ensure proper staffing c. determine materiality d. outline specific audit procedures

b. ensure proper staffing c. determine materiality d. outline specific audit procedures

Whether or not information is material is based on the ________ point of view. a. external auditors' b. financial statement users' c. company managements'

b. financial statement users'

Computer-initiated transactions: a. make it easier to judge correctness of the transactions b. include invoice and purchase order generation c. make it difficult to trace authorizations d. can be generated without human review

b. include invoice and purchase order generation c. make it difficult to trace authorizations d. can be generated without human review

The descriptive nature of an item or issue ___________ when setting performance materiality. a. has no effect b. is an important quality factor c. is an important quantitative factor

b. is an important qualitative factor

The primary reason for accepting or not accepting an audit engagement is: a. the auditors' independence or lack thereof b. management integrity c. agreement (or lack of agreement) regarding fees d. whether or not special skills are required for the audit

b. management integrity

Computerized processing of similar transactions: a. virtually eliminates the occurrence of any type of error b. may result in all transactions being processed incorrectly c. significantly reduces the amount of time auditors spend on tests of detail

b. may result in all transactions being processed incorrectly

Confirmations: a. should be given to client personnel for mailing b. request information the recipient can supply c. are signed by the audit engagement partner d. are typically printed on the client's letterhead e. should be returned directly to the audit firm

b. request information the recipient can supply d. are typically printed on the client's letterhead e. should be returned directly to the audit firm

The substantive audit plan depends almost exclusively upon the: a. size of the client b. risk assessment of the client c. industry the client is in d. size of the audit team

b. risk assessment of the client

Cloud computing: a. increases computing costs and has additional risks b. saves computing costs but has additional risks c. saves computing costs and reduces overall risks d. increases computing costs but reduces overall risks

b. saves computing costs but has additional risks

Engagement letters: a. are only required for new clients b. set forth audit objectives c. define management and auditor responsibilities d. should not mention fees e. reduce the risk of misunderstandings

b. set forth audit objectives c. define management and auditor responsibilities e. reduce the risk of misunderstandings

According to professional standards, a. the auditor must determine if particular accounts require a higher materiality amount than that established for the overall financial statements b. the auditor must determine if particular accounts require a lower materiality amount hat the established for the overall financial statements c. once the auditor has set an overall materiality level, it is to be applied uniformly to all accounts

b. the auditor must determine if particular accounts require a lower materiality amount than that established for the overall financial statements

Some inaccuracy is allowed in financial statements because: a. some public companies choose not to follow GAAP or IFRS b. that cost of finding small misstatements is high c. issuing financial statements could be delayed d. unimportant inaccuracies are immaterial

b. the cost of finding small misstatements is high c. issuing financial statements could be delayed d. unimportant inaccuracies are immaterial

The auditor selects a basic source document and follows the processing path forward to its final recording and to the financial statements when engaged in: a. confirmation b. tracing c. vouching d. inquiry

b. tracing

When an audit specialist is engaged during an audit, it is best to hire someone who is ___________ to the company under audit. a. related b. unrelated

b. unrelated

Computer-Assisted Audit Techniques (CAAT) cannot be used for: a. scanning b. vouching c. confirmation d. .fraud investigation

b. vouching

The first step in the engagement planning process is: a. assigning the engagement partner in charge b. assessing audit risk c. a detailed understanding of the client's business, industry, and strategy d. evaluating the client and agreeing to accept the engagement

c. a detailed understanding of the client's business, industry, and strategy

Professional standards now require that the materiality level of the financial statement as a whole need to be expressed: a. as a percentage of reported net income b. for each major classification on the financial statements c. as a specified amount

c. as a specified amount

Risk management activities are undertaken: a. at the conclusion of the audit engagement b. only during the audit fieldwork c. before beginning any audit engagement d. before issuing the audit report

c. before beginning any audit engagement

A(n) ______________ audit plan contains specific procedures needed to obtain an understanding of the client's internal control system and test that understanding for those controls that relate to the relevant financial statement assertions. a. assertion b. substantive c. internal control d. control test

c. internal control

An audit plan: a. details the terms of the engagement, including auditor and management responsibilities b. is a contract between the client and the auditor that details the time line and fees for the audit c. is a comprehensive list of specific procedures needed to gather sufficient appropriate evidence

c. is a comprehensive list of specific procedures needed to gather sufficient appropriate evidence

Public accounting firms are: a. only obligated to provide services for clients the firm has audited in the past b. obligated to provide services for any public company that files reports with the SEC c. not obligated to provide services for any new or existing client

c. not obligated to provide services for any new or existing client

Materiality is based on: a. definitive, quantitative guidelines b. industry benchmarks c. professional judgement

c. professional judgement

The audit planning process is required to be led by the: a. senior auditor in charge b. board of directors c. audit team assigned to the entity d. assigned engagement partner

d. assigned engagement partner

With respect to a predecessor auditor, a perspective auditor: a. is prohibited by auditing standards from initiating any contact b. should not inform the perspective client if the auditor decides to initiate contact c. may not accept the engagement if information from the predecessor cannot be obtained d. must initiate contact and attempt to obtain certain basic information

d. must initiate contact and attempt to obtain certain basic information

Confirmation is a representative audit procedure used to test the PCAOB and ASB assertion of: a. existence or occurrence b. presentation and disclosure c. valuation and allocation d. rights and obligations

d. rights and obligations

The most important facet of the current audit evidence documentation files is the requirement that they show: a. resolution of differences among audit term members b. audited management assertions c. how exceptions were resolved or treated d. the auditors' conclusions e. work was adequately planned and supervised

d. the auditors' conclusions

The physical presence of assets is an example of evidence available to test the ASB assertion of _____________.

existence

Physical inspection of tangible assets provides strong evidence regarding the assertion of ______________ and may provide some evidence related to the assertion of ________________.

existence; valuation

When a document is initially prepared by a third party and returned to the client who gives it to the auditor, it is considered _______________-_____________ documentary evidence.

external-internal

An auditor's unbiased "state of mind" towards the financial statements and other information audited is referred to as the auditor possessing _________ in ________________.

independence in fact

The collection of verbal evidence from independent parties and management is the audit procedure known as _______________.

inquiry

To plan the nature, timing, and extent of further audit procedures to be performed, an auditor "should establish a(n) ______________ level for the financial statements as a whole that is appropriate in light of the company's earnings and other relevant factors."

materiality

Viewing a client's physical facilities and participating in a surprise payroll distributions are examples of the audit procedure known as ________________.

observation

The two categories of audit documentation are _______________ files and ____________________ files.

permanent; current

All important overall planning information and documentation that the audit team is following generally accepted auditing standards is often summarized in a(n) ___________ ___________.

planning memorandum

A public accounting firm that has been terminated or has voluntarily withdrawn from an audit engagement is known as the _________ ___________

predecessor auditor

In addition to the audit engagement partner, audit teams typically include a(n) ________________ ________________ partner who reviews the audit team's work in critical audit areas.

quality assurance

When the audit team recomputes computations previously performed by client personnel, the audit procedure is called ____________.

recalculation

Testing the completeness assertion by following a sample of shipping documents forward to sales invoices, the sales journal and revenue earned is called _______________.

tracing