Audit Test One

D) Accounts Receivable.

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

"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) Both a and c.

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

D) Controls related to executive compensation.

All of the following controls may address the risk of fraud and management override except: A) Controls over related-party transactions. B) Controls over period-end adjusting entries. C) Controls related to significant management estimates. D) Controls related to executive compensation.

B) Recalculation.

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.

C) Observation.

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) To develop recommendations for the control system.

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.

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

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.

A) It should include an opinion.

An auditor may need to obtain a service auditor's report when a client receives accounting services such as payroll from a service organization. Which of the following statements is true regarding this service audit report? A) It should include an opinion. B) It provides the client auditor with a guarantee regarding whether the client's control procedures have been placed in operation. C) The client auditor need not inquire about the service auditor's professional reputation. D) The client auditor should perform the procedures at the service organization to verify the information in the report.

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

An auditor plans to examine a sample of 40 accounts payable invoices for proper approval as prescribed by the client'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.

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.

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 less than the TDR.

D) All of the above.

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 statements assertion. C) Demonstrate that the underlying accounting records agreed or reconciled with the financial statements. D) All of the above.

C) Pre-numbered client sales invoices.

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 client. C) Pre-numbered client sales invoices. D) The opinion of an outside specialist regarding inventory valuation.

All of the above.

Audit risk is typically considered and assessed A) At the assertion level. B) At the account balance level. C) For the financial statements as a whole. D) All of the above.

B) Determining the nature, extent, and timing of subsequent audit procedures to be performed.

Auditors obtain an understanding of a non-public client'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.

B) Completeness.

Discussions with the owner-manager of an audit client reveal to the auditor that the company is more concerned with minimizing their 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.

Control risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.

Detection Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. A necessary substantive audit procedure is omitted.

Engagement Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. An auditor complies with GAAS on an audit engagement, but the shareholders sue the auditor for issuing misleading financial statements.

Inherent Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. Cash is more susceptible to theft than an inventory of coal.

Detection Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. Confirmation of receivables by an auditor fails to detect a material misstatement.

Control Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. Disbursements have occurred without proper approval.

Inherent Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.

Inherent Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. Technological developments make a major product obsolete.

Control Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. There is inadequate segregation of duties.

Inherent Risk or Engagement Risk

For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. XYZ Company, a client, lacks sufficient working capital to continue operations.

account balances, completeness

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

account balances, valuation and allocation

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

account balances, valuation and allocation

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

account balances, existence

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Examining a new plastic extrusion machine to ensure that this major acquisition was received.

transactions and events, cutoff

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

account balances, valuation and allocation OR completeness

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Obtaining a letter from the client's attorney indicating that there were no lawsuits in progress against the client.

account balances, completeness or existence

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Performing test counts of the warehouse personnel's count of the raw material.

account balances, valuation and allocation

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Reviewing the general ledger for unusual adjusting entries

Account balances, existence

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Sending a written request to the client's customers requesting that they report the amount owed to the client.

transaction and events; accuracy

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Tracing the prices used by the client's billing program for pricing sales invoices to the client's approved price list.

account balances, completeness or existence

For each of the audit procedures listed in Problem 5-32, identify the category (assertions about classes of transactions and events or assertions about account balances) and the primary assertion being tested. Watching the client's warehouse personnel count the raw materials inventory.

Inspection of records or documents OR reperformance

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

Analytical Procedures

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

Inquiry

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Discussing the adequacy of the allowance for doubtful accounts with the credit manager.

Inspection of tangible assets

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Examining a new plastic extrusion machine to ensure that this major acquisition was received.

Inspection of records or documents

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

confirmation

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Obtaining a letter from the client's attorney indicating that there were no lawsuits in progress against the client.

reperformance

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Performing test counts of the warehouse personnel's count of the raw material.

scanning

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Reviewing the general ledger for unusual adjusting entries.

Confirmation

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Sending a written request to the client's customers requesting that they report the amount owed to the client.

inspection of records or documents OR reperformance

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Tracing the prices used by the client's billing program for pricing sales invoices to the client's approved price list.

observation

For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. Watching the client's warehouse personnel count the raw materials inventory.

B) Complete little or no tests of controls.

For non-public companies with preliminary control risk assessments set at the maximum, 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) Examining supporting documentation for purchases for evidence of proper authorization.

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.

C) Reduction of debt financing costs.

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.

B) Identifying weaknesses in the documentation of client controls.

Generalized audit software (GAS) would likely be used in the audit of accounts receivable for all of the following except: A) Selection and printing of sample accounts to be confirmed. B) Identifying weaknesses in the documentation of client controls. C) Performing analytical procedures using client's trial balance data. D) Recomputing an estimate of the allowance for doubtful accounts based on an accounts receivable aging analysis.

C) Low.

If acceptable audit risk is set at low and the assessed risk of material misstatement is high, then detection risk must be A) High. B) Moderate. C) Low. D) Cannot determine detection risk from the information given.

A) Increasing supervision.

If risk of material misstatement is higher than originally anticipated, the auditor may respond by A) Increasing supervision. B) Reducing control risk. C) Reducing inherent risk. D) None of the above.

C) Alert the authorities.

If the auditor determines that a material misstatement may be due to fraud, the auditor should do all of the following except: A) Attempt to obtain evidence to determine whether the misstatement was, in fact, due to fraud. B) Discuss the findings with an appropriate level of management. C) Alert the authorities. D) Suggest that management consult with legal counsel.

A) Identify all general IT controls

In order to be able to set control risk below the maximum, 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.

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

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.

D) Unusual changes that may signal possible account misstatements.

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.

It will likely increase the risk of material misstatement.

One of your clients recently upgraded its accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system. This installation took place over the last nine months of the client's fiscal year and is nearly 100% complete by the balance sheet date. Which of the following best describes the main affect of this event on the audit risk model for the current year? A) It will likely increase the risk of material misstatement. B) It will likely decrease the risk of material misstatement. C) It will likely decrease the detection risk. D) It will likely increase the detection risk.

B) 4, 1, 3, 2

Place the following steps in the top-down, risk-based approach to the audit of ICFR in their proper order: A) 1, 2, 3, 4 B) 4, 1, 3, 2 C) 4, 2, 1, 3 D) 3, 4, 1, 2

C) Tolerable deviation rate.

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.

B) Flowcharts.

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.

C) Significant deficiencies and material weaknesses.

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.

Compute the level of detection risk.

The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except: A) Inquiries of management and others. B) Compute the level of detection risk. C) Analytical procedures. D) Observation and inspections.

A Wall Street analyst inquiry regarding future profit projections.

The disclosure of fraud to parties other than the client's senior management and its audit committee ordinarily would be precluded by the auditor's ethical or legal obligations of confidentiality. However, the auditor has a duty to disclose the information to parties outside the entity in all of the following circumstances except: A) A court subpoena in conjunction with a fraud investigation. B) A successor auditor makes inquiries in determining whether to accept the client. C) A Wall Street analyst inquiry regarding future profit projections. D) To comply with legal or regulatory requirements.

C) Human errors or mistakes.

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

Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements.

The existence of audit risk is recognized by the statement in the auditor's standard report that the A) Auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. B) Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management. C) Financial statements are presented fairly, in all material respects, in conformity with GAAP. D) Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

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.

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.

B) Most publicly-held companies

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.

C) Sampling risk.

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

Detection risk.

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist, when in fact a misstatement did occur, is known as A) Audit risk. B) Detection risk. C) Inherent risk. D) Business risk.

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

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 client is subject to all provisions of the Securities Exchange Act of 1934. B) Express an opinion on the effectiveness of the entity's internal control. C) Report to both the PCAOB and SEC those clients with unsatisfactory internal controls. D) Provide report feedback but disclaim an opinion on management's assessment.

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.

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

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.

D)

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.

A) Sample deviation rate + allowance for sampling risk.

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.

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

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.

Operating losses make a hostile takeover imminent.

Which of the following factors is least likely to represent an opportunity to commit fraud? A) The audit committee is ineffective. B) Poor internal controls over cash transactions. C) The existence of highly complex transactions. D) Operating losses make a hostile takeover imminent.

The nature of the credit authorization process.

Which of the following factors would an auditor least likely consider when assessing the inherent risk associated with client sales transactions? A) Billings are made using the percentage-of-completion method of revenue recognition. B) The nature of the credit authorization process. C) Some invoices are normally billed prior to shipments [which occur at a later date]. D) The conditions of the sale allow for a right of return or the right to modify the purchase agreement.

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

Which of the following is a proper reason for not conducting tests of controls for non-public 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.

A) Guarantee effectiveness of the entity's ICFR.

Which of the following is not a requirement for management under Section 404 of the Sarbanes-Oxley Act of 2002? A) Guarantee effectiveness of the entity's ICFR. B) Accept responsibility for the effectiveness of the entity's ICFR. C) Support the evaluation of the entity's ICFR with sufficient evidence, including documentation. D) Present a written assessment regarding the effectiveness of the entity's ICFR as of the end of the most recent fiscal year.

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

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.

D) Human resource background checks.

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.

Collusion.

Which of the following is not one of the three conditions that are generally present when fraud occurs? A) Incentive or pressure. B) Opportunity. C) Rationalization or attitude. D) Collusion.

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

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.

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.

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

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.

C) Client review notation.

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

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) Existence.

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

B) A misstatement found by the auditor that is due to incorrect pricing on a sales invoice.

Which of the following represents a known misstatement? A) A misstatement that management knows about, but the auditor does not. B) A misstatement found by the auditor that is due to incorrect pricing on a sales invoice. C) A misstatement arising from the differences between the auditor's estimate and management's estimate of the allowance for doubtful accounts. D) A misstatement based on an auditor's projection of an error found in a sample.

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

Which of the following represents the correct sequence of audit steps that come after first obtaining an understanding and documenting the client'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.

C) CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements.

Which of the following statements best describes how the requirements under Sarbanes-Oxley changed the auditor's responsibility for issuing an opinion in connection with the audits of most public companies? A) CPA firms are now required to add a second opinion related to the timeliness of the financial information provided to the public in addition to an opinion on the overall fairness of the financial statements. B) CPA firms are required to rely less on their own direct evidence to support their opinion regarding the effectiveness of controls. C) CPA firms are now required to issue a second opinion related to their evaluation of the effectiveness of internal controls in addition to an opinion on the overall fairness of the financial statements. D) While the CPA firm is required to issue an additional opinion, that opinion is for client use only and does not need to be made available in the company annual report.

D) The two dimensions of control deficiencies are likelihood of occurrence and magnitude.

Which of the following statements concerning control deficiencies is true? A) Auditors are required to report all control deficiencies to the audit committee. B) A control deficiency is a type of significant deficiency. C) Significant deficiencies are a subset of material weaknesses that must be reported to the public. D) The two dimensions of control deficiencies are likelihood of occurrence and magnitude.

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

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.

D) The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor's assessment.

Which of the following statements is false concerning the audit requirements of the Sarbanes-Oxley Act of 2002 and AS5 related to internal controls? A) Management's report should state its responsibility for establishing and maintaining effective internal control. B) Management should identify material weaknesses in its report. C) The auditor should evaluate whether the internal controls are effective in accurately and fairly reflecting the client's transactions. D) The auditor should provide recommendations to the audit committee for improving internal control as part of the auditor's assessment.

A) The test data should consist of only valid conditions.

Which of the following statements is false regarding the use of the test data approach in the evaluation of an accounting system? A) The test data should consist of only valid conditions. B) Only one transaction generally needs to be tested. C) The test data should consist of only those valid and invalid conditions of interest to the auditor. D) The test data should be processed on the client's operating system under the auditor's control.

The level of risk must be set quantitatively (i.e., inherent risk is 60%).

Which of the following statements is false related to the auditor's responsibility to document its risk assessment? A) The documentation may include the use of questionnaires. B) Management's response to high-risk areas identified by the auditor should be included in the documentation. C) The level of risk must be set quantitatively (i.e., inherent risk is 60%). D) All of the above are false.

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.

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.

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

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 Boardfor small public company clients. 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.

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

Which of the following statements regarding auditor documentation of the client'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 client. D) No one particular form of documentation is necessary, and the extent of documentation may vary.

A) Engaging the external auditors to conduct cutoff tests.

Which of the following steps or procedures is least likely to be performed as part of management's assessment of the effectiveness of internal controls? A) Engaging the external auditors to conduct cutoff tests. B) Determining the locations or business units to be evaluated. C) Evaluating the design effectiveness and operating effectiveness of selected controls. D) Communication of its findings to the external auditors.

C) Qualified [a significant deficiency exists].

Which of the following types of audit reports would not be appropriate for an auditor to issue on the effectiveness of a client'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].

B) Confirmation.

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

C) Attribute sampling.

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.

Misinterpretation by management of facts that existed when the financial statements were prepared.

Which of the following would be classified as an error? A) Misinterpretation by management of facts that existed when the financial statements were prepared. B) Misappropriation of assets for the benefit of management. C) Preparation of records by employees to cover a fraudulent scheme. D) Intentional omission of the recording of a transaction to benefit a third party.

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

With regard to clients 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.