Chapter 6

The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective? a) (1) Trace from source documents to journals. b) (2) Vouch from journals to source documents. c) Either (1) or (2).

a) (1) Trace from source documents to journals.

Tracing from source documents to journals most directly tests: a) Completeness (understatements). b) Existence (overstatements)

a) Completeness (understatements).

A documented audit plan is required on all audits. a) True b) False

a) True

An engagement letter represents a written contract between the auditors and the client. a) True b) False

a) True

Tests of controls are designed to determine whether the client's controls are operating effectively. a) True b) False

a) True

The portions of the auditors' audit plans relating to internal control are generally organized around the: a) major transaction cycles. b) substantive procedures. c) analytical procedures. d) inherent risk assessment.

a) major transaction cycles.

A successor auditor should attempt communication with a predecessor auditor: a) prior to accepting the engagement. b) after the engagement has been accepted. c) both prior to acceptance of the engagement and after the engagement has been accepted. d) is not required to do so.

a) prior to accepting the engagement.

The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective? a) (1) Trace from source documents to journals. b) (2) Vouch from journals to source documents. c) Either (1) or (2).

b) (2) Vouch from journals to source documents.

Which of the following is the best example of a substantive procedure? a) Examining a sample of cash disbursements to test whether expenses have been properly approved. b) Confirming balances of accounts receivable. c) Comparing signatures on checks to a list of authorized check signers. d) Flowcharting a client's cash receipts system.

b) Confirming balances of accounts receivable.

Which of the following is most likely to be included in an auditor's inquiry of management while obtaining information to identify the risk of material misstatement due to fraud? a) Are financial reporting operations controlled by and limited to one location? b) Does it have knowledge of fraud or suspect fraud? c) Has the possibility of management override been assessed? d) Does the company have insurance against all forms of fraud?

b) Does it have knowledge of fraud or suspect fraud?

Vouching from journals (or ledgers) to source documents most directly tests: a) Completeness (understatements). b) Existence (overstatements).

b) Existence (overstatements).

Which of the following best describes what is meant by the term "fraud risk factor"? a) Factors that, when present, indicate that risk exists. b) Factors often observed in circumstances where frauds have occurred. c) Factors that, when present, require modification of planned audit procedures. d) Weaknesses in internal control identified during an audit.

b) Factors often observed in circumstances where frauds have occurred.

Auditors should never spend more time on an audit than is called for in a conscientiously developed time budget. a) True b) False

b) False

CPAs cannot ethically refuse to provide auditing services to any prospective client which the CPAs are competent to audit, if the prospective client is willing to pay the CPAs' standard audit fees. a) True b) False

b) False

Which of the following is correct concerning audit plans? a) Plans are required for public company audits, but not for non-public company audits. b) They are often revised throughout the audit. c) It is essential that the audit engagement team perform every audit step. d) They are generally less detailed than are audit engagement letters.

b) They are often revised throughout the audit.

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

b) Use less predictable audit procedures.

In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which of the following is a risk factor for misappropriation of assets? a) Generous performance-based compensation systems. b) Management preoccupation with increased financial performance. c) An unreliable accounting system. d) Strained relationships between management and the auditors.

c) An unreliable accounting system.

Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? a) Arrange to make copies, for inclusion in the working papers, of those client supporting documents examined by the auditors. b) Arrange to provide the client with copies of the audit plans to be used during the audit. c) Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information. d) Arrange to have the auditors prepare and post any necessary adjusting or reclassification entries prior to final closing.

c) Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? a) Decrease the use of professional skepticism and increase the use of internally generated evidence. b) Use predictable, well established audit procedures. c) Consider further management's selection and application of significant accounting principles. d) Supervise members of the audit team less closely and rely more upon judgment.

c) Consider further management's selection and application of significant accounting principles.

The primary objective of tests of details of transactions performed as substantive procedures is to: a) Comply with generally accepted auditing standards. b) Attain assurance about the reliability of the accounting system. c) Detect material misstatements in the financial statements. d) Evaluate whether management's policies and procedures are operating effectively.

c) Detect material misstatements in the financial statements.

The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective? a) (1) Trace from source documents to journals. b) (2) Vouch from journals to source documents. c) Either (1) or (2).

c) Either (1) or (2).

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a) Adequate disclosure. b) Quality control. c) Materiality and audit risk. d) Client acceptance.

c) Materiality and audit risk.

Which portion of an audit is least likely to be completed before the balance sheet date? a) Tests of controls. b) Issuance of an engagement letter. c) Substantive procedures. d) Assessment of control risk.

c) Substantive procedures.

Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. a) Incentive or pressure. b) Opportunity. c) Supervisory position. d) Attitude.

c) Supervisory position.

Which of the following statements is not correct regarding the auditor's determination of materiality? a) It is the smallest amount of misstatement that would probably influence the judgment of a reasonable person relying upon the financial statements. b) Auditing standards require auditors to consider materiality in planning the audit. c) The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement. d) The appropriate financial statement base for computing materiality may vary based on the nature of the client's business.

c) The planning level of materiality will normally be the larger of the amount considered for the balance sheet versus the income statement.

Which of the following is the most likely first step the auditors would perform at the beginning of an initial audit engagement? a) Prepare a rough draft of the financial statements and of the auditors' report. b) Consider internal control. c) Tour the client's facilities and review the general records. d) Consult with and review the work of the predecessor auditors prior to discussing the engagement with the client management.

c) Tour the client's facilities and review the general records.

Which of the following should not normally be included in the engagement letter for an audit? a) A description of the responsibilities of client personnel to provide assistance. b) An indication of the amount of the audit fee. c) A description of the limitations of an audit.. d) A listing of the client's branch offices selected for testing.

d) A listing of the client's branch offices selected for testing.

Which of the following topics is not normally included in an engagement letter? a) The auditors' responsibilities with respect to the audit. b) A request that the client sign a copy of the letter. c) Client responsibilities regarding the audit. d) A schedule of individual audit team member billing rates.

d) A schedule of individual audit team member billing rates.

Which of the following is a basic tool used by the auditors to control the audit work and review the progress of the audit? a) Time and expense summary. b) Engagement letter. c) Progress flowchart. d) Audit plan.

d) Audit plan.

The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as a) Business risk. b) Engagement risk. c) Control risk. d) Detection risk.

d) Detection risk.

Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? a) Analysis of balance sheet accounts. b) Analysis of income statement accounts. c) All matters of continuing accounting significance. d) Facts that might bear on the integrity of management.

d) Facts that might bear on the integrity of management.

Which of the following risk factors indicates an increased risk of misappropriation of assets? a) High turnover of senior management. b) Strained relationships between management and auditors. c) Overly complex organizational structure. d) Lack of mandatory vacations for employees performing key functions.

d) Lack of mandatory vacations for employees performing key functions.

The audit committee of a company must be made up of: a) Representatives from the client's management, investors, suppliers, and customers. b) The audit partner, the chief financial officer, the legal counsel, and at least one outsider. c) Representatives of the major equity interests, such as preferred and common stockholders. d) Members of the board of directors who are not officers or employees.

d) Members of the board of directors who are not officers or employees.

As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether: a) Each recorded sale represents a bona fide transaction. b) All sales have been recorded in the sales journal. c) All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. d) Recorded sales have been properly posted to customer accounts.

d) Recorded sales have been properly posted to customer accounts.

Which of the following is least likely to be considered a risk assessment procedure in a financial statement audit? a) Analytical procedures. b) Inquiries of management. c) Observation and inspection relating to client activities. d) Tests of controls.

d) Tests of controls.

An audit committee's responsibilities normally would not include: a) discussing the meaning and significance of audited financial statements. b) discussing problems and experience with independent auditors in completing the audit of annual financial statements. c) nominating the independent auditors. d) discussing all details of the audit plans of the independent auditors.

d) discussing all details of the audit plans of the independent auditors.

Hawkins, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client's refusal to permit this will bear directly on Hawkins' 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.