audit exam 2

Which of the following is true regarding technological advances and auditing? A) A well-controlled, automated accounting system that processes routine transactions with few errors can reduce the number of times auditors need to utilize sampling techniques in an audit. B) A well-controlled, automated accounting system that processes routine transactions with few errors can eliminate the number of times auditors need to utilize sampling techniques in an audit. C) Powerful audit software (e.g., ACL) has eliminated the need for sampling in an audit. D) Technology, though not there yet, will eventually eliminate the need for auditors to rely on sampling in an audit.

A) A well-controlled, automated accounting system that processes routine transactions with few errors can reduce the number of times auditors need to utilize sampling techniques in an audit.

The likelihood of assessing control risk too high is the risk that the sample selected to test controls A) Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment. B) Does support the auditor's planned assessed level of control risk when the true operating effectiveness of the control does not justify such an assessment. C) Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes. D) Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.

A) Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment.

Auditors obtain an understanding of a nonpublic entity's internal control for the primary purpose of: A) Gathering sufficient evidence to provide a reasonable basis for an opinion on the financial statements. B) Determining the nature, extent, and timing of subsequent audit procedures to be performed. C) Determining whether interim audit testing is appropriate. D) Providing documentary evidence to present to the audit committee.

A) Gathering sufficient evidence to provide a reasonable basis for an opinion on the financial statements.

In order to be able to set control risk at a lower level, the auditor must do all of the following except: A) Identify all general IT controls. B) Identify specific controls that will be relied upon. C) Perform tests of controls. D) Conclude on the achieved level of control risk.

A) Identify all general IT controls.

Which of the following is true relating to audit work paper documentation? A) It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered. B) It should not include copies of any client-generated documents. C) It is generally examined and utilized by the client after the audit is completed. D) It must be destroyed once the audit is complete and the opinion is rendered. Which of the following is true relating to audit work paper documentation?

A) It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered.

Which of the following best illustrates the components that make up the upper deviation rate [UDR]? A) Sample deviation rate + allowance for sampling risk. B) Sample deviation rate + risk of assessing control risk too high. C) Tolerable deviation rate + allowance for sampling risk. D) Expected population deviation rate + allowance for sampling risk.

A) Sample deviation rate + allowance for sampling risk.

Which of the following statements is correct with regard to the quality or appropriateness of evidential matter? A) The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B) Evidential matter must be either valid or relevant but need not be both. C) Internal accounting data alone may be considered sufficient appropriate evidential matter to issue an unqualified opinion on financial statements. D) Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained.

A) The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources.

Place the following steps in the top-down, risk-based approach to the audit of ICFR in their proper order: 1. Identify significant accounts and disclosures and their relevant assertions. 2. Select controls to test. 3. Understand likely sources of misstatement. 4. Identify entity level controls. A) 1, 2, 3, 4. B) 4, 1, 3, 2. C) 4, 2, 1, 3. D) 3, 4, 1, 2.

B) 4, 1, 3, 2.

Which of the following best illustrates the concept of sampling risk? A) An auditor may select audit procedures that are not appropriate to achieve the specific objective. B) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. C) An auditor may fail to recognize errors in the documents examined for the chosen sample. D) The documents related to the chosen sample may not be available for inspection.

B) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

For nonpublic companies with preliminary control risk assessments set at high, auditors are likely to: A) Use a reliance strategy. B) Complete little or no tests of controls. C) Complete interim testing of account balances. D) Test controls extensively.

B) Complete little or no tests of controls.

Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue? A) Existence and occurrence. B) Completeness. C) Rights and obligations. D) Valuation.

B) Completeness

Which of the following types of evidence is most likely to utilize sampling? A) Scanning. B) Confirmation. C) Observation. D) Analytical procedures.

B) Confirmation.

For which of the following audit tests would an auditor most likely use attribute sampling? A) Observation of employees who control mailroom receipts. B) Examining supporting documentation for purchases for evidence of proper authorization. C) Examining invoices in support of the valuation of equipment additions. D) Selected accounts receivable for confirmation of account balances.

B) Examining supporting documentation for purchases for evidence of proper authorization.

The role of the registered independent auditing firm relative to its clients' internal controls under the Sarbanes-Oxley Act of 2002 is to A) Express an opinion on whether the entity is subject to all provisions of the Securities Exchange Act of 1934. B) Express an opinion on the effectiveness of the entity's control. C) Report to both the PCAOB and SEC those entities with unsatisfactory internal controls. D) Provide report feedback but disclaim an opinion on management's assessment.

B) Express an opinion on the effectiveness of the entity's control.

The auditor may document the achieved level of control risk using all of the following except: A) Structured working papers. B) Flowcharts. C) Internal control questionnaire. D) A memorandum.

B) Flowcharts.

The requirements of Section 404 of the Sarbanes-Oxley Act of 2002 apply to A) All companies that are subject to an independent audit. B) Most publicly-held companies. C) All privately-held companies. D) All companies with sales in excess of $500 million.

B) Most publicly-held companies.

With regard to entities that have locations or business units that are judged to have financial reporting risks, the auditor A) Need not perform any audit procedures. B) Must first determine whether those risks are adequately addressed by entity-level controls. C) Must first determine whether the internal audit staff has performed testing at such locations. D) Must first evaluate the risk of financial reporting fraud.

B) Must first determine whether those risks are adequately addressed by entity-level controls.

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is: A) Scanning. B) Recalculation. C) Observation. D) Confirmation.

B) Recalculation

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk (CR) lower than appropriate. The most likely explanation for this situation is that A) The deviation/failure rates of both the auditor's sample and the population exceed the tolerable deviation rate [TDR]. B) The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR. C) The deviation/failure rate in the auditor's sample exceeds the TDR, but the deviation/failure rate in the population is less than the TDR. D) The deviation/failure rates of both the auditor's sample and the population are less than the TDR.

B) The deviation/failure rate in the auditor's sample is less than the TDR, but the deviation/failure rate in the population exceeds the TDR.

Which of the following is a proper reason for not conducting tests of controls for nonpublic companies? A) The internal control structure appears very strong. B) The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk. C) The company does not have any flowcharts of its system available for review. D) The auditor prefers the control risk to be the minimum.

B) The procedures require more audit effort than the projected benefits to be obtained from lowering the control risk.

All of the following factors should be considered by the auditor when deciding on the extent of controls testing except: A) The nature of the control to be tested. B) The time the auditor has to test controls before a report must be issued. C) The frequency with which the control is applied. D) The importance of the control.

B) The time the auditor has to test controls before a report must be issued.

When assessing the tolerable deviation rate (TDR), the auditor should consider that while deviations from control procedures increase the risk of material misstatements, such deviations may not necessarily result in errors. This explains why A) Deviations from examined control procedures at a given rate would normally be expected to result in a higher rate of dollar errors. B) A recorded disbursement that is properly authorized may nonetheless contain a material dollar error. C) A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal. D) Deviations would result in dollar errors in the accounting records only when they occurred in different transactions.

C) A recorded disbursement that is not properly authorized may nonetheless be recorded properly in the cash disbursements journal.

Which of the following presumptions is correct regarding the reliability of audit evidence? A) To be reliable, evidence should be convincing rather than simply persuasive. B) Information obtained directly from outside sources is considered to be the most reliable type of evidence. C) An effective internal control system provides increased assurance with regard to the reliability of audit evidence. D) Reliability generally refers to the amount and relevance of corroborative audit evidence obtained.

C) An effective internal control system provides increased assurance with regard to the reliability of audit evidence.

Which of the following types of statistical testing is likely to be used for a test of controls? A) Monetary-unit sampling. B) Probability-proportional-to-size sampling. C) Attribute sampling. D) Classical variables sampling.

C) Attribute sampling.

Which of the following is true regarding audit evidence? A) Auditors typically gather audit evidence about one whole financial statement at a time rather than one account at a time. B) Auditors rarely gather audit evidence about one business process at a time. C) Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported. D) When audit evidence supports management's assertions, a qualified audit report can be issued.

C) Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported.

Which of the following items is generally not included as part of audit documentation? A) Heading. B) Indexing. C) Client review notation. D) Tickmarks.

C) Client review notation.

Most of the steps for planning and carrying out a nonstatistical test of controls are the same as those for a statistical test of controls. Which of the following represent the steps that could differ between nonstatistical and statistical sampling as discussed in the text? A) Defining the control deviation conditions, determining the sample size, calculating the upper deviation rate. B) Defining the control deviation conditions, defining the sampling unit, calculating the computed upper deviation rate. C) Determining the sample size, selecting the sample items, calculating the computed upper deviation rate. D) Defining the sampling unit, selecting the sample items, performing the audit procedures.

C) Determining the sample size, selecting the sample items, calculating the computed upper deviation rate.

Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory? A) Valuation. B) Completeness. C) Existence. D) Rights and obligations.

C) Existence

The effectiveness of internal control is reduced by: A) Computerized accounting records. B) Flowcharts. C) Human errors or mistakes. D) Both a and c.

C) Human errors or mistakes.

According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is: A) Reperformance. B) Inspection. C) Observation. D) Analytical procedures.

C) Observation

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? A) Vendor confirmations of accounts payable balances. B) Copies of bank statements obtained from the entity under audit. C) Pre-numbered sales invoices. D) The opinion of an outside specialist regarding inventory valuation.

C) Pre-numbered sales invoices

Which of the following types of audit reports would not be appropriate for an auditor to issue on the effectiveness of an entity's internal controls? A) Unqualified [no material weaknesses identified]. B) Adverse [a material weakness exists]. C) Qualified [a significant deficiency exists]. D) Disclaimer [unable to perform key audit procedures].

C) Qualified [a significant deficiency exists].

Which of the following is not considered a general control? A) Back up and disaster recovery controls. B) Password protection on the central server. C) Reconciliation of payroll record count with the number of active employees. D) Requiring change authorization forms on all program software.

C) Reconciliation of payroll record count with the number of active employees.

Internal controls are designed to achieve company objectives in all of the following areas except: A) Safeguarding of assets. B) Reliability of financial reporting. C) Reduction of debt financing costs. D) Compliance with laws and regulations.

C) Reduction of debt financing costs.

Which of the following statements is true regarding nonstatistical sampling? A) It quantifies the auditor's exposure to sampling risk. B) Its use is required by the Public Company Accounting Oversight Board for small public company audits. C) Sample sizes for non-statistical sampling should be comparable to statistical sampling. D) It gives greater assurance than statistical sampling that samples are randomly selected.

C) Sample sizes for non-statistical sampling should be comparable to statistical sampling.

The risk of incorrect rejection is associated with A) Inherent risk. B) Engagement risk. C) Sampling risk. D) Audit risk.

C) Sampling risk.

The auditor must report the following to the audit committee or others charged with governance: A) Only material weaknesses. B) Only significant deficiencies. C) Significant deficiencies and material weaknesses. D) All control deficiencies identified during the audit.

C) Significant deficiencies and material weaknesses.

According to the text, each of the following is a main purpose for performing audit procedures except: A) To obtain an understanding of the entity and its environment. B) To test the operating effectiveness of controls. C) To develop recommendations for the control system. D) To detect material misstatements in the financial statements.

C) To develop recommendations for the control system.

Sample size varies indirectly with which of the following: A) Desired level of confidence. B) Expected population deviation rate. C) Tolerable deviation rate. D) All of the above.

C) Tolerable deviation rate.

An auditor plans to examine a sample of 40 accounts payable invoices for proper approval as prescribed by the entity's internal accounting control procedures. One of the invoices in the chosen sample cannot be found, and the auditor is unable to use alternative procedures to determine whether the invoice was properly approved. The auditor should A) Choose another invoice to replace the missing one in the sample. B) Consider this compliance test invalid and proceed with substantive tests because internal control cannot be relied upon. C) Treat the missing invoice as a deviation for the purpose of evaluating the sample. D) Select a completely new random set of 40 invoices.

C) Treat the missing invoice as a deviation for the purpose of evaluating the sample.

Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following? A) Goodwill. B) Deferred Taxes. C) Machinery and Equipment. D) Accounts Receivable.

D) Accounts Receivable

Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the entity's internal control? A) Test of Controls, Assess Control Risk, Determine Extent of Substantive Tests, Reassess Control Risk. B) Assess Control Risk, Test of Controls, Determine Extent of Substantive Testing, Reassess Control Risk. C) Assess Control Risk, Determine Extent of Substantive Testing, Test of Controls, Reassess Control Risk. D) Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

D) Assess Control Risk, Test of Controls, Reassess Control Risk, Determine Extent of Substantive Testing.

A reliance strategy is chosen when the auditor: A) Plans on conducting tests of controls. B) Has set the control risk at a high level. C) Has set the control risk at a lower level. D) Both a and c.

D) Both a and c.

Understanding each of the components of internal control provides knowledge about: A) The design of tests of controls. B) The assessment of inherent risks. C) Factors that affect the risk of material misstatement. D) Both a and c.

D) Both a and c.

"Remediation" refers to A) Management's required annual communication to the Audit Committee regarding changes in the ICFR. B) The auditor's required annual communication to the Audit Committee regarding weaknesses found in the ICFR. C) Management's testing of a new control designed to eliminate a previous material weakness. D) Corrective actions taken by management to eliminate a material weakness.

D) Corrective actions taken by management to eliminate a material weakness.

Which of the following is not one of the five major components of internal control? A) Risk assessment. B) Control activities. C) Information and communication system. D) Human resource background checks.

D) Human resource background checks.

Which of the following statements regarding auditor documentation of the entity's internal control is correct? A) Documentation must include narrative memorandums. B) No documentation is necessary to satisfy GAAS, however, oral inquiry is required at minimum. C) Internal control questionnaires are specifically tailored to meet the needs of each individual entity. D) No one particular form of documentation is necessary, and the extent of documentation may vary.

D) No one particular form of documentation is necessary, and the extent of documentation may vary.

Which of the following statements is true in an attribute sampling plan where the tolerable deviation rate is 7%, the computed upper deviation rate is 6.5%, the sample deviation rate is 2%, and the risk of assessing control risk too low is 5%? A) The auditor is likely to increase control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. B) The auditor is likely to decrease control risk because the computed upper deviation rate is less than the risk of assessing control risk too low. C) The auditor is likely to determine that the results do not support reliance on the control because the computed upper deviation rate plus the sample deviation rate is greater than the tolerable deviation rate. D) The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.

D) The auditor is likely to determine that the results do support reliance on the control because the computed upper deviation rate is less than the tolerable deviation rate.

One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify: A) Transactions that have not been properly authorized. B) Illegal acts undetected as a result of poor internal controls. C) Inefficient operations. D) Unusual changes that may signal possible account misstatements.

D) Unusual changes that may signal possible account misstatements.

Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing? A) Send confirmations to selected vendors to verify amounts. B) Examine a random sample of inventory documents. C) Manually foot, or sum, several randomly-selected pages. D) Use generalized audit software to foot, or sum, the entire listing.

D) Use generalized audit software to foot, or sum, the entire listing.

Audit documentation provides the principal support for which of the following? A) Demonstrate how the audit complied with auditing and related professional practice standards. B) Support the basis for the auditor's conclusions concerning every material financial statement assertion. C) Demonstrate that the underlying accounting records agreed or reconciled with the financial statements. D) All of the above.

D) all of the above