Chapter 6 Practice Question
All audit procedures need to be performed at or after the client's balance sheet date. a. True b. False
False
Audit documentation serves as support for the financial statements. a. True b. False
False
Audit evidence used to support an audit opinion is obtained solely from audit procedures. a. True b. False
False
Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the client to assist in their understanding of the specific audit procedures that will be performed. a. True b. False
False
Auditors should mail third-party confirmations through the client's mailroom. a. True b. False
False
Inquiries of client personnel are not a frequent means of evidence gathering by an auditor. a. True b. False
False
Inspection of an asset generally provides reliable evidence about the rights and obligations assertion related to that asset. a. True b. False
False
Inspection of tangible assets generally provides reliable evidence with respect to the completeness of the assets, but not necessarily about the existence of the assets. a. True b. False
False
The audit program specifies what the client must do to perform the audit in accordance with generally accepted accounting procedures. a. True b. False
False
The auditor multiplies the quantity of inventory on the inventory ledger by the cost of the inventory to arrive at total inventory balance per product number. This is an example of recalculation by footing. a. True b. False
False
The auditor should use a standardized audit program, without any modifications, for all clients. a. True b. False
False
The auditor utilizes the same audit program and the same procedures each year for each client in order to ensure that nothing is missed in the current year audit. a. True b. False
False
The client's verbal evidence is more reliable than evidence from independent outside sources. a. True b. False
False
The greatest risk of recording transactions in the incorrect period occurs during the roll-forward period. a. True b. False
False
The purpose of performing analytical procedures in the planning stage of an audit is to gather audit evidence and make conclusions about account balances. a. True b. False
False
The reliability of audit evidence relates to the connection between the audit procedure being performed and the assertion being audited. a. True b. False
False
The sufficiency of evidence is a measure of evidence quality. a. True b. False
False
Tracing is a process that helps establish that recorded transactions are valid. a. True b. False
False
A procedure that involves only inspection of documentation is usually considered to be of lower quality than a procedure involving reperformance. a. True b. False
True
An example of physical observation is the auditor's testing of inventory by counting it to substantiate the existence assertion. a. True b. False
True
An outside specialist may assist the auditor in obtaining sufficient, appropriate evidence concerning the analysis of complex tax compliance issues. a. True b. False
True
Audit documentation should include the initials or electronic signature in order to identify the audit personnel responsible for the work and the managers and partners reviewing the work. a. True b. False
True
Audit evidence consists of both information that corroborates management's assertions and information that contradicts such assertions. a. True b. False
True
Confirmation statements from banks are an example of third-party external documents. a. True b. False
True
Evidence can be directly or indirectly relevant to an assertion. a. True b. False
True
For an auditor to test the existence assertion of assets, testing will be performed beginning with the recorded asset and ending with the source documents. a. True b. False
True
In a reasonableness test, the auditor develops an expected value of an account by using data wholly or partly independent of the client's accounting information system. a. True b. False
True
Internal documentation is generally less reliable than external documentation. a. True b. False
True
Internal documentation is more reliable to the auditor if the internal control surrounding the documentation is considered strong than if it is considered weak. a. True b. False
True
Many related-party transactions have no higher risk of material misstatement than similar transactions between unrelated parties. a. True b. False
True
One of the most rigorous approaches to substantive analytical procedures is regression analysis. a. True b. False
True
The auditor's concern for potential fraud in the financial statements will most likely result in increased testing for the overstatement of revenues. a. True b. False
True
The auditor's job is to gather sufficient appropriate audit evidence on which to base an opinion. a. True b. False
True
The direction of testing from the source documents to recorded amounts provides evidence regarding the completeness of liabilities and expenses. a. True b. False
True
The primary importance of the audit program is its guidance of the overall conduct of the audit. a. True b. False
True
The relevance of audit evidence depends on the audit assertion being tested. a. True b. False
True
The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced by risk, potential management bias associated with the evidence, and the quality of the internal control system underlying the preparation of the evidence. a. True b. False
True
Ulanda and Mudana, CPAs, are performing an audit on McArnee, Inc. Ulanda selects a sample from certain source documents and traces them forward to the accounts payable ledger. The purpose of this test is to determine the possibility of understated liabilities. a. True b. False
True
Underlying accounting records consist of evidence of controls as well as supporting records such as checks, invoices, the general and subsidiary ledger and journal entries. a. True b. False
True
When testing management estimates, the auditor should understand the process that management uses to develop estimates. a. True b. False
True
While inspecting documents, auditors should use original documents rather than copies, because copies are easy for management to falsify. a. True b. False
True
Appropriateness of evidence is a measure of which of the following? a. Quality of evidence. b. Sufficiency of evidence. c. Meaning of evidence. d. Quantity of evidence.
a
Conclusions are typically documented by auditors in which type of work paper? a. Audit memoranda. b. Audit program. c. Audit planning memo. d. Representation letter.
a
Each of the audit procedures that an auditor could select possesses which of the following characteristics? a. Audit procedures take time, effort, and money. b. Audit procedures are difficult to perform. c. Audit procedures require multiple people from the firm to perform. d. All of the above.
a
External documentation may lack reliability. Which of the following is the most probable reason for that? a. The documentation may have been altered if the process is not controlled from inception. b. The auditor may decide not to use the documentation and replace it with other documents. c. The external party may be competent in performing duties. d. The documentation may be properly understood by the client in the response.
a
Footing, cross-footing, and tests of extensions are examples of which approach to gathering evidence? a. Recalculation. b. Vouching. c. Examination of documentation. d. Reprocessing.
a
Performance of audit procedures at an interim date causes the risk of material misstatement occurring between the interim date and the end of the year to do which of the following? a. Increase. b. Become more difficult to ascertain. c. Remain the same. d. Decrease.
a
Reprocessing of transactions involves which of the following? a. Testing forward. b. Directional testing either forward or backward. c. Testing at a point in time. d. Testing backward.
a
The auditor is testing the completeness assertion. Which of the following statements is true regarding the auditor's work? a. The auditor would perform a process referred to as tracing. b. The auditor would take a sample of recorded transactions and obtain supporting documentation for those transactions. c. For a sample of items recorded in the sales journal, the auditor would obtain the related shipping documents and customer orders. d. The auditor would take a sample of source documents and obtain additional supporting documents for those transactions.
a
The auditor normally considers both underlying accounting records and corroborating information in the audit process. Underlying accounting records do not include which of the following items? a. Minutes of meetings. b. Evidence of controls. c. Checks, invoices, and contracts. d. General and subsidiary ledgers.
a
The process of vouching helps establish which of the following regarding recorded transactions? a. Transactions are valid. b. Transactions have been recorded. c. Transactions are complete. d. Transactions are presented properly.
a
The written record that forms the basis for the auditor's conclusions is referred to as what? a. Audit documentation. b. Audit adjustment. c. Accounting records. d. Footing.
a
When using the audit procedure vouching, the auditor is primarily concerned with which of the following assertions? a. Existence. b. Classification. c. Authorization. d. Completeness.
a
Which of the following characteristics are not normally included in quality audit documentation? a. All are included in quality audit documentation. b. Initials of the person preparing and reviewing the document. c. A cross-reference. d. An assessment of whether the test indicates the possibility of material misstatement in an account.
a
Which one of the following is the primary reason for documenting audit work? a. To provide a stand-alone medium that gives audit conclusions and supports the opinion. b. To supply a point of reference for all auditors performing the work subsequently. c. To give the client a full reporting of all work performed on their behalf. d. To prevent litigation by other parties that question the audit performance.
a
Which one of the following would be the least reliable type of evidence? a. Evidence from an easily overridden information system. b. Letters of communication from the Securities Exchange Commission. c. Physical examination of perpetual inventory. d. Confirmations returned by bank directly to the auditor.
a
A date at which audit evidence is collected earlier than the balance sheet date is referred to as what? a. Significant date. b. Interim date. c. Subsequent date. d. Cutoff period.
b
In evaluating cost of evidence, which of the following evidence qualities of the audit usually has the lowest cost? a. High quality. b. Low quality. c. All cost the same. d. Medium quality.
b
To be considered reliable evidence, confirmations must be controlled by which of the following parties? a. A client's controller or CFO. b. An external auditor. c. A client employee responsible for accounts receivable. d. A client's internal audit department.
b
Which of the following is an example of inspection of documentation? a. Observe controls. b. Review shipping documents. c. Estimate the expected amount of interest income. d. Recalculate the total amount include on a sales invoice.
b
Which of the following is not a type of internal documentation? a. Business documents. b. Third-party documents. c. Legal documents. d. Accounting documents.
b
Which of the following statements is true regarding audit documentation? a. Audit documentation would identify who reviewed the audit work but not who performed the audit work. b. Audit documentation provides the principal support for the audit opinion expressed by the auditor. c. Auditors document only those significant issues that have not been resolved by the audit report date. d. Documentation must be in paper format.
b
Which of the following transactions would be least likely to be a related-party transaction? a. A purchase transaction between an entity and its owners. b. Writing off obsolete inventory prior to year-end. c. A debt-related transaction between an entity and one of its SPEs. d. An exchange of property between an entity and a joint venture in which the entity has part ownership.
b
An auditor selects a sample of items recorded and traces them back to the supporting documentation. This is an example of which of the following? a. Direct testing for rights. b. Directional testing for completeness. c. Directional testing for existence. d. Direct testing for valuation.
c
Directional testing involves testing transactions or balances for which type of error? a. Understatement. b. Neither overstatement nor understatement. c. Either overstatement or understatement. d. Overstatement.
c
Directional testing is important to an auditor because of which of the following factors? a. It tests for existence and completeness simultaneously. b. The auditor must remain organized when conducting an audit. c. Certain accounts are more prone to be misstated by overstatement than others. d. The primary concern of the auditor is the understatement of asset and revenue accounts.
c
In which of the following scenarios are analytical procedures most appropriate as a substantive audit procedure? a. The auditor's primary objective is to reduce audit costs to a minimum. b. Planning analytical procedures indicate that misstatements are likely to occur in significant account balances. c. Substantive analytical procedures would not be appropriate in any of the above scenarios. d. Internal control risk is high, and therefore it is not efficient to test controls.
c
Observation suffers from which of the following limitations? a. Observation of processing is rarely unobtrusive. b. Observation of processing on one day does not necessarily indicate how transactions were processed on a different day. c. All the above. d. None of the above.
c
Recalculations of the client's computations would not include which of the following procedures? a. Cross-footing. b. Footing. c. Cutoff. d. Extension.
c
The auditor is gathering evidence to test the assertion that the client's capitalization of leased equipment assets is properly valued. Which of the following sources of evidence will the auditor generally find to be of the highest quality (most reliable and relevant)? a. Inspection of the leased equipment. b. Confirmation of the current purchase price for similar equipment with vendors. c. Inspection of documents, including the lease contract and recalculation of capitalized amount and current amortization. d. Confirmation of the original cost of the equipment with the lessor.
c
The extent of procedures is affected mostly by which of the following factors? a. The time of year in which the client takes a physical inventory in the warehouse. b. The availability of the client's staff at or near the balance sheet date. c. The auditor's judgment that misstatements are probable in certain balances. d. The sheer volume of procedures to be applied by the auditor.
c
The reliability of a client's internal documentation is most affected by which of the following? a. Management's ability to understand generally accepted audit standards. b. The type of audit report that will be issued. c. Management's motivation to misstate accounts. d. The auditor's independence.
c
Two determinants of the persuasiveness of evidence include which of the following? a. Competence and sufficiency. b. Relevance and reliability. c. Appropriateness and sufficiency. d. Independence and effectiveness.
c
Vouching of transactions deals with which of the following? a. Testing forward. b. Directional testing either forward or backward. c. Testing backward. d. Testing at a point in time.
c
What is determined to be appropriate and sufficient will be affected by which of the following? a. The client's risk of material misstatement. b. The risk of material weakness in internal controls. c. Either a or b. d. None of the above.
c
Which of the following is not an estimate that requires significant auditor judgment and skepticism? a. Allowance for bad debt. b. Valuation of goodwill. c. Common stock and related additional paid-in capital. d. Obligations for pension plans.
c
Which of the following is the primary source for evidence to corroborate the existence of pending litigation? a. Disclosures in financial statements. b. Management representation letters. c. Attorney confirmations. d. Vendor confirmations.
c
Which of the following procedures would an auditor typically perform first when assessing the reasonableness of management's estimate of its pension liability? a. Review transactions occurring prior to the report release date to assess the reasonableness of management estimates. b. Identify sensitive management assumptions. c. Develop an understanding of management's process for developing the estimate. d. Inspect documentation related to the pension transactions that the client has recorded.
c
Which of the following statements is false regarding substantive analytical procedures? a. Substantive analytical procedures are not required to be performed on all audit engagements. b. If the results of substantive analytical procedures suggest that an account balance is materially correct, the auditor can reduce the evidence needed from tests of details. c. The auditor would perform substantive analytical procedures after tests of details. d. All of these statements are true.
c
An audit program is created to specify which of the following? a. The type of audit opinion to be rendered based upon procedures performed. b. The audit procedures that will be performed every year for the client. c. How an auditor should think while performing audit procedures. d. Audit objectives and procedures to be followed during the audit process.
d
An audit program provides an effective means for which of the following? a. Reviewing the completeness and persuasiveness of procedures performed. b. Recording the audit work performed and those responsible for performing the work. c. Organizing and distributing the work. d. All the above.
d
An auditor determines that management integrity is high, the risk of material misstatement is low, and the client's internal controls are effective. Which of the following conclusions can be reached regarding the need to obtain direct evidence about the account balances? a. Direct evidence can be obtained solely through analytical procedures. b. Direct evidence of account balances is not needed. c. Direct evidence should be obtained for all accounts, regardless of the auditor's assessment of control risk. d. Direct evidence can be limited to material account balances, and the extent of testing should be sufficient to corroborate the auditor's assessment of low risk.
d
An example of an external document would include which of the following? a. Vendor invoices. b. Customer orders. c. Confirmation replies from customers. d. All the above.
d
Audit documentation should contain which of the following? a. A heading that includes the name of the audit client, an explanatory title, and the balance sheet date. b. The initials or electronic signature of the auditor performing the audit test and the date the test was completed. c. The initials or electronic signature of the manager or partner who reviewed the documentation and the date the review was completed. d. All of the above.
d
Reprocessing of transactions helps establish that all valid items have been recorded. Reprocessing tests which of the following assertions? a. Existence. b. Occurrence. c. Rights. d. Completeness.
d
Sufficient evidence gathered by the auditor involves which of the following? a. Obtaining limited evidence to achieve efficiency. b. The type of evidence to be obtained. c. The use of an audit program to obtain evidence. d. The quantity of evidence to be obtained.
d
The auditor may use analytical procedures during which phase of the audit? a. Planning the audit. b. Substantive testing. c. Completing the audit. d. All of the above.
d
The processes used by management in developing estimates include which of the following? a. Controls over the process. b. The reliability of underlying data in developing the estimate. c. Use of outside experts by management (for example, how they were used and their expertise). d. All of the above.
d
When may audit procedures be performed?I - on the balance sheet date.II - prior to the balance sheet date.III - subsequent to the balance sheet date. a. I only. b. I and III only. c. II only. d. I, II, and III.
d
When using confirmations with outside parties, the auditor must assure which of the following about the outside party? a. The outside party exists. b. The outside party is able to respond objectively and independently. c. The outside party is unbiased in responding. d. All the above.
d
Which of the following assertions is the primary assertion that is satisfied by physically observing the client's count of inventory? a. Valuation. b. Completeness. c. Rights. d. Existence.
d
Which of the following is a factor that the auditor should consider as they affect the reliability and relevance of information produced by a management's specialist? a. Competence, capabilities, and objectivity of that specialist. b. Work performed by that specialist. c. Appropriateness of that specialist's work as audit evidence for the relevant assertion. d. All of the above.
d
Which of the following is not a characteristic of quality audit documentation? a. Organization and assembly of documentation in an orderly fashion. b. Authenticated identification of the person responsible for completing the procedure and conclusions. c. Clear communication as to how testing was performed, the results of testing, and conclusions. d. Headings that include the name and signature of the client representative that the auditor interacted with while performing testing.
d
Which of the following is not a factor that would impact the effectiveness of a substantive analytical procedure? a. Plausibility and predictability of the relationships in the data. b. Nature of the assertion being tested. c. Rigor of the analytical procedure employed. d. Excessive disaggregation of the relevant data.
d
Which of the following statements describes a purpose of an audit program? a. An audit program is used to specify the procedures to be performed in obtaining audit evidence. b. An audit program is used to record the completion of each audit step. c. An audit program is useful for monitoring the progress of the audit. d. All of these statements describe a purpose of an audit program.
d
Which of the following statements is true regarding the sufficiency of evidence needed to test an account? a. A relationship does not exist between evidence sufficiency and evidence quality. b. Evidence sufficiency is a measure of evidence quality. c. For a specific client, evidence sufficiency will be the same across all accounts. d. Evidence sufficiency is affected by the quality of evidence.
d
Which of the following types of audit evidence is the least reliable? a. Original documents. b. Evidence derived from a well-controlled system. c. Evidence from independent outside sources. d. Evidence from the client's organization.
d
Which of the following types of audit evidence is the most reliable? a. Facsimiles of documents. b. Evidence from a poorly controlled system. c. Evidence from the client's organization. d. Directly observable evidence.
d
Which one of the following would be considered the most reliable type of audit evidence? a. Computerized general ledger. b. Customer accounts receivable files. c. Purchase orders from vendors. d. Confirmations from banks.
d
Which one of the following would be the most reliable type of evidence? a. Indirectly obtained evidence. b. Inquiry with the in-house attorney. c. Photocopies. d. Observation of assets.
d