Auditing Test 2 - Questions

What are the 4 financial statement assertions relating to account balances?

1. Existence 2. Rights and Obligations 3. Completeness 4. Valuation and Allocation

What are the 5 financial statement assertions relating to Classes of Transactions and Events?

1. Occurrence 2. Completeness 3. Accuracy 4. Cutoff 5. Classification

What are the 5 financial statement assertions relating to Presentation and Disclosure?

1. Occurrence 2. Rights and Obligations 3. Completeness 4. Accuracy and Valuation 5. Classification and Understandability

What are the qualitative considerations of materiality? (under materiality amount but still deemed material)

1. affects company's compliance with contractual agreement 2. Reverse a trend in earnings 3. Change in a loss to income or vice-versa

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) confirm the amounts c) review subsequent transactions d) develop an independent estimate

B) confirm the amounts

"All assets have been recorded" is related to which assertion?

Completeness

"Transactions are recorded in the correct accounting period" is related to which assertion?

Cutoff

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to:

Errors and Misappropriation of Assets

"There is such an asset" is related to which assertion?

Existence and Occurrence

The components of the risk of misstatement are:

Inherent Risk and Control Risk

"Assets are properly classified" is related to which assertion?

Presentation and Disclosure

"The Company legally owns the asset" is related to which assertion?

Rights and Obligations

What is engagement risk?

The risk off loss or injury to the auditor's reputation by association with a client that goes bankrupt or whose management lacks integrity

"Assets are recorded at proper amounts" is related to which assertion?

Valuation

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 client's management of its primary responsibility for 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

During financial statement audits, auditors seek to restrict which type of risk? a) control risk b) detection risk c) inherent risk d) audit risk

b) detection risk

Which of the following statements best describes why auditors investigate related party transactions? a) related party transactions are generally illegal acts b) the substance of related party transactions may differ in 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 in their form

Which statement is correct relating to a potential successor auditor's responsibility for communicating with the predecessor auditors in connection with a prospective new audit client? a) the successor auditors have no responsibility to contact the predecessor auditors b) the successor auditors should obtain permission from the prospective client to contact the predecessor auditors c) the successor auditors should contact the predecessors regardless of whether the prospective client authorizes the contact d the successor auditors need not contact the predecessors if the successors are aware of all relevant facts

b) the successor auditors should obtain permission from the prospective client to contact the predecessor auditors

The auditors' understanding established with a client should be established through a(n): a) oral communication with the client b) written communication with the client c) written or oral communication with the client d) completely detailed audit plan

b) written communication with the client

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

Which of the following is most likely to be an overall response to fraud risks identified in an audit? a) only use CPAs on the engagement b) place increased emphasis on the audit of objective transactions rather than subjective transactions c) supervise members of the audit team less closely and rely more upon judgment d) use less predictable audit procedures

d) use less predictable audit procedures

Which of the following is not a financial statement assertion relating to account balances? a) completeness b) existence c) rights and obligations d) valuation and allowances

d) valuation and allowances

A form filed with the SEC when a company changes auditors is: a) form 8-k b) form 10-k c) form s-1 d) form b-1

a) Form 8-k

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 related to every major account d) Increase the level of detection risk

a) achieve audit objectives related to a particular assertion

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 GAAP b) assist 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 GAAP

Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? a) confirmation of amounts b) review of management's process of development c) independent development of an estimate d) review of subsequent events

a) confirmation of amounts

What type of transactions ordinarily has high inherent risk because they involve management judgments or assumptions in formulating accounting balance? a) estimation b) nonroutine c) qualified d) routine

a) estimation

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

Which of the following is generally true about the sufficiency of audit evidence? a) the amount of evidence that is sufficient varies inversely with the risk of material misstatement b) the amount of evidence concerning a particular account varies inversely with the materiality of the account c) the amount of evidence concerning a particular account varies inversely with the inherent risk of the account d) when evidence is appropriate with respect to an account it is also sufficient

a) the amount of evidence that is sufficient varies inversely with the risk of material misstatement

Which of the following topics is not normally included in an engagement letter? a) the auditor's preliminary assessment of internal control b) the auditor's estimate of fee for the engagement c) limitations on the scope of the engagement d) a description of the responsibility for the detection of fraud

a) the auditor's preliminary assessment of internal control

When a company has changed auditors, according to the professional standards: a) the successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management b) the predecessor must always respond fully to all inquiries made by the successor auditor c) the successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement d) the successor may choose not to attempt any communication with the predecessor auditor

a) the successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management

Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in: a) a memorandum to be placed in the permanent section of the auditing work papers b) an engagement letter c) a client representation letter d) a confirmation letter attached to the constructive services letter

b) an engagement letter

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

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 is not an assertion relating to classes of transactions? a) accuracy b) sufficiency c) cutoff d) classification

b) sufficiency

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

c) anticipated costs of audit completion

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

Which of the following would be least likely to be considered an audit planning procedure? a) using an engagement letter b) develop the overall audit strategy c) perform the risk assessment d) develop the audit plan

c) perform the risk assessment

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 anaylsis

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? a) confirmation b) observation c) reviewing subsequent events and transactions d) analyzing corporate organizational structure

c) reviewing subsequent events and transactions

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? a) confirmation b) observation c) reviewing subsequent events or transactions d) analyzing corporate organizational structures

c) reviewing subsequent events or transactions

Assertions with high inherent risk are least likely to involve: a) complex calculations b) difficult accounting issues c) routine transactions d) significant judgment by management

c) routine transactions

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 unlikely misstatements detected in prior audits c) substantial turnover of management d) a large amount of assets

d) a large amount of assets

A successor auditor is required to attempt communication with the predecessor auditor prior to: a) performing test of controls b) testing beginning balances for the current year c) making a proposal for the audit engagement d) accepting the engagement

d) accepting the engagement

An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the risk assessment phase of the audit by the use of: a) tests of transactions and balances b) an assessment of internal control c) an audit time budget d) analytical procedures

d) analytical procedures

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 b) note 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

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the prospective auditor's working papers. the prospective client's refusal to permit this will bear directly on Hawkin's decision concerning the a) adequacy of the preplanned audit plan b) ability to establish consistency in application of accounting principles between years c) apparent scope limitation d) Integrity of management

d) integrity of management

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 auditor's opinion

d) support the auditors opinion

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

d) unusual transactions