Chapter 5

Which of the following is not a function of audit working papers? a) Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. b) Assist audit team members responsible for supervision in reviewing the work. c) Assist auditors in planning future engagements. d) Assist peer reviewers and inspectors in performing their roles.

a) Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles.

Which of the following procedures is not customarily used by the auditors in determining the existence of related parties? a) Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions. b) Evaluate the company's procedures for identifying and properly accounting for related-party transactions. c) Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period. d) Review prior years' work papers for the names of known related parties.

a) Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions.

Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items? a) Lead schedules. b) Account analyses. c) Control accounts. d) Supporting schedules.

a) Lead schedules.

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: a) Low. b) High. c) Identical. d) Indeterminate.

a) Low.

As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? a) To increase the efficiency of the audit by eliminating the need for other audit procedures. b) To remind the client's management of its primary responsibility for the financial statements. c) To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. d) To provide evidence in those areas dependent upon management's future intentions.

a) To increase the efficiency of the audit by eliminating the need for other audit procedures.

A client representation letter helps to remind the client officers of their primary and personal responsibility for the financial statements. a) True b) False

a) True

A confirmation reply from an account receivable account ordinarily would be considered more reliable evidence than an account receivable clerk's reply to an inquiry from the auditor. a) True b) False

a) True

The recording of a fraudulent credit sale at well above the item's cost on the last day of the year will increase the current ratio. a) True b) False

a) True

In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: a) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. c) Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. d) Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.

Related party transactions have in common that they all result from dealings between parties related due to ownership interests. a) True b) False

b) False

In what section of the audit working papers would a long-term lease agreement be filed? a) Current working paper file. b) Permanent working paper file. c) Lead schedule file. d) Corroborating documents file.

b) Permanent working paper file.

Which of the following statements best describes why auditors investigate related party transactions? a) Related party transactions generally are illegal acts. b) The substance of related party transactions may differ from their form. c) All related party transactions must be eliminated as a step in preparing consolidated financial statements. d) Related party transactions are a form of management fraud.

b) The substance of related party transactions may differ from their form.

Analytical procedures are most likely to detect: a) Weaknesses of a material nature in internal control. b) Unusual transactions. c) Noncompliance with prescribed control activities. d) Improper separation of accounting and other financial duties.

b) Unusual transactions.

The permanent file of the auditors' working papers generally should include: a) names and addresses of all audit staff personnel on the engagement. b) a copy of the corporate charter. c) time and expense reports. d) a copy of key customer confirmations.

b) a copy of the corporate charter.

A principal purpose of a representation letter from management is to: a) confirm management's approval of the work performed by the auditors. b) remind management of its primary responsibility for the financial statements. c) substitute for other evidence-gathering audit procedures. d) serve as an introduction to company personnel and authorize the auditors to examine the records.

b) remind management of its primary responsibility for the financial statements.

In developing an expectation for analytical procedures, the auditors are least likely to consider: a) Financial information for comparable prior periods. b) Relationships between financial information and relevant nonfinancial data. c) Anticipated costs of audit completion. d) Relationships among elements of financial information within a period.

c) Anticipated costs of audit completion.

Which of the following is not a primary approach to auditing an accounting estimate? a) Review and test management's process for developing the estimate. b) Review subsequent transactions. c) Confirm the amounts. d) Develop an independent estimate.

c) Confirm the amounts.

Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: a) Gathering evidence concerning account balances that have not changed from the prior year. b) Retesting internal control procedures. c) Considering unusual or unexpected account balances that were not previously identified. d) Performing a test of transactions to corroborate management's financial statement assertions.

c) Considering unusual or unexpected account balances that were not previously identified.

Of the following, which is the least reliable type of audit evidence? a) Confirmations mailed by outsiders to the auditors. b) Correspondence between the auditors and suppliers. c) Copies of sales invoices inspected by the auditors. d) Canceled checks returned in the year-end bank statement directly to the client.

c) Copies of sales invoices inspected by the auditors.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? a) Trend analysis. b) A detailed test of balance analysis. c) Ratio analysis. d) Risk analysis.

c) Ratio analysis.

Which of the following is not a factor that affects the independent auditors' judgment as to the quantity, type, and content of working papers? a) The need for supervision of the engagement. b) The nature of the audit report. c) The timing and the number of personnel to be assigned to the engagement. d) The nature of the financial statements, schedules, or other information upon which the auditors are reporting.

c) The timing and the number of personnel to be assigned to the engagement.

Which of the following is not a management assertion? a) Rights. b) Valuation. c) Verification. d) Existence.

c) Verification.

Tracing a sample of documents from the source documents to the ledgers is designed to test the financial statement assertion of: a) existence. b) validity. c) completeness. d) valuation.

c) completeness.

Which of the following business characteristics is not indicative of high inherent risk? a) Operating results that are highly sensitive to economic factors. b) Large likely misstatements detected in prior audits. c) Substantial turnover of management. d) A large amount of assets.

d) A large amount of assets.

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: a) Remain silent on the matter since it is an internal matter of the auditing firm. b) Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. c) Document the additional work required, since all disagreements of this type will require expanded substantive procedures. d) Document the assistant auditor's position and how the difference of opinion was resolved.

d) Document the assistant auditor's position and how the difference of opinion was resolved.

Which of the following is not a financial statement assertion made by management? a) Existence of recorded assets and liabilities. b) Completeness of recorded assets and liabilities. c) Valuation of assets and liabilities. d) Effectiveness of internal control.

d) Effectiveness of internal control.

A primary purpose of the audit working papers is to: a) Aid the auditors by providing a list of required procedures. b) Provide a point of reference for future audit engagements. c) Support the underlying concepts included in the preparation of the basic financial statements. d) Support the auditors' opinion.

d) Support the auditors' opinion.

The auditors' working papers will generally be least likely to include documentation showing how the: a) client's internal control structure had been considered. b) unusual matters were resolved. c) engagement had been planned. d) client's schedules were prepared.

d) client's schedules were prepared.

When an audit is made in accordance with generally accepted auditing standards, the independent auditors must: a) observe the taking of physical inventory on the balance sheet date. b) perform tests of controls. c) use statistical sampling. d) perform analytical procedures.

d) perform analytical procedures.

Analytical procedures are: a) diagnostic tests of financial information that may not be classified as audit evidence. b) analytical tests of financial information made by a computer. c) statistical tests of financial information designed to identify areas requiring intensive investigation. d) tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

d) tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.

Performing analytical procedures may help an auditor to: a) Achieve audit objectives related to a particular assertion. b) Develop an effective system of quality control. c) Meet PCAOB requirements that analytical procedures be performed relating to every major account. d) Increase the level of detection risk.

a) Achieve audit objectives related to a particular assertion.

Audit working papers generally provide evidence of compliance with planning and risk assessment requirements of an audit, but not of performing further audit procedures. a) True b) False

b) False

Audit working papers should include: a) details on client ownership of individual working papers. b) all authorization details for overtime worked. c) content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards. d) a number of permanent files each year and a general file that summarizes the permanent files..

c) content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards.

The major reason auditors gather evidence is to: a) detect fraud. b) assess control risk. c) form an opinion on the financial statements. d) evaluate management.

c) form an opinion on the financial statements.

Although there are sometimes exceptions, ordinarily the most reliable audit evidence is: a) generated internally through a system of effective controls rather than through a computerized system of controls. b) from nonindependent sources within the client company rather than independent sources outside the client company. c) a facsimile of original documents, rather than photocopy. d) documentary in form rather than an oral representation.

d) documentary in form rather than an oral representation.

Evidence is generally considered sufficient when: a) it has the qualities of being relevant, objective, and free from bias. b) it is reliable. c) it has been obtained by random selection. d) there is enough of it to afford a reasonable basis for an opinion on the financial statements.

d) there is enough of it to afford a reasonable basis for an opinion on the financial statements.