Chapter 9

Which of the following are indicators of possible management bias? (Select all that apply.) A. Changes in the method of making the accounting estimate that are based on subjective assumptions. B. Selecting or developing significant assumptions that yield an estimate more favorable for management's objectives. C. Selecting an estimate that indicates a pattern of optimism or pessimism. D. Inspecting the outcome of prior period accounting estimates.

A. Changes in the method of making the accounting estimate that are based on subjective assumptions. B. Selecting or developing significant assumptions that yield an estimate more favorable for management's objectives. C. Selecting an estimate that indicates a pattern of optimism or pessimism.

Which of the following situations increases the reliability of data being used for substantive analytical procedures? A. During the prior-year audit, the data was subjected to audit testing. B. Broad industry averages will be used in comparison with the client's data. C. The source of the data is the client's internal budget reports. D. Controls over the data have not been tested.

A. During the prior-year audit, the data was subjected to audit testing.

Which of the following are the conditions when limited tests of details of transactions occurring between the interim period and the year-end are necessary? (Select all that apply.) A. No significant changes in the control environment have occurred. B. The entity's control environment has been assessed as effective. C. Controls have been tested. D. Major changes are required in internal controls

A. No significant changes in the control environment have occurred. B. The entity's control environment has been assessed as effective. C. Controls have been tested.

Which of the following are causes of misstatements? (Select all that apply.) A. Omission of an amount or disclosure B. Inaccurate substantive procedure used C. Inappropriate selection of accounting policies D. Incorrect accounting estimate caused by a misinterpretation of facts

A. Omission of an amount or disclosure C. Inappropriate selection of accounting policies D. Incorrect accounting estimate caused by a misinterpretation of facts

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? A. Relationships involving income statement accounts B. Transactions subject to management discretion C. Data subject to audit testing in the prior year D. Relationships involving balance sheet accounts

A. Relationships involving income statement accounts

In the context of the impact of risk of material misstatement (RMM) on the level of substantive testing, which of the following statements are true in the case of small sample sizes? (Select all that apply.) A. The acceptable level of detection risk is high. B. Substantive tests are less effective. C. Evidence is collected at year-end. D. combined assessed level of inherent risk and control risk is low.

A. The acceptable level of detection risk is high. B. Substantive tests are less effective. D. combined assessed level of inherent risk and control risk is low.

Which of the following initial procedures do auditors perform before applying substantive procedures when auditing an account balance? (Select all that apply.) A. Trace the beginning balance of the prepaid insurance account to the auditor's working papers from the prior year's audit. B. Scan the transactions in the account for unusual items. C. Check if appropriate and understandable terminology is used, as prescribed by the applicable financial reporting framework. D. Obtain a trial balance or other detailed report for the account.

A. Trace the beginning balance of the prepaid insurance account to the auditor's working papers from the prior year's audit. B. Scan the transactions in the account for unusual items. D. Obtain a trial balance or other detailed report for the account.

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states the objective of the auditor is to obtain sufficient appropriate evidence that _______. A. accounting estimates are reasonable, and disclosures are adequate B. accounting estimates are reasonable, but disclosures are not adequate C. disclosures are adequate D. the accounting estimates are reasonable

A. accounting estimates are reasonable, and disclosures are adequate

An accounting estimate is _______. A. an approximation of a monetary amount when a precise means of measurement is not available B. a figure that should be left to the external auditor to determine at the end of the year C. prohibited by GAAP and should be questioned by the auditor D. an exact monetary amount when a precise means of measurement is available

A. an approximation of a monetary amount when a precise means of measurement is not available

For clients with multiple locations, the auditors_______. A. could vary which locations are tested each year and the type of audit procedures that are performed at the different locations B. should always hire another auditor to check other locations, and not attempt to do this themselves C. could vary which locations are tested each year and not change the type of audit procedures that are performed at the different locations D. could not vary which locations are tested each year, but instead vary the type of audit procedures that are performed at the different locationsA

A. could vary which locations are tested each year and the type of audit procedures that are performed at the different locations

Which of the following would not be a reason to increase the extent of a substantive test? A. Internal controls are weak. B. Auditors have time to test more items. C. Qualitative factors suggest there may be errors in the account. D. The risk of material misstatement is high.

B. Auditors have time to test more items.

Which of the following can be used as both a risk assessment procedure and a substantive procedure for the audit of accounting estimates? A Inspect documentation for proper approval of the accounting estimate. B. Inquire of management about the methods and assumptions used in developing the estimate. C. Gain an understanding of what is required by the applicable financial reporting framework. D. Inspect events happening after year-end and up to the date of the auditor's report.

B. Inquire of management about the methods and assumptions used in developing the estimate.

Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period? A. Internal controls are weak and the risk of material misstatement is low. B. Internal controls are weak and the risk of material misstatement is high. C. Internal controls are strong and the risk of material misstatement is low. D. Internal controls are strong and the risk of material misstatement is high.

B. Internal controls are weak and the risk of material misstatement is high.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? A. Substantive analytical procedures and tests of controls B. Tests of controls and tests of details C. Tests of details and substantive procedures D. Substantive procedures and analytical procedures

B. Tests of controls and tests of details

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? A. Management's assertions that internal controls exist and are operating efficiently. B. The planned level of assurance at the relevant assertion level. C. The effectiveness of internal controls. D. The planned level of control risk.

B. The planned level of assurance at the relevant assertion level.

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatements/Measure of tolerable misstatement A. No/No B. Yes/Yes C. Yes/No D. No/Yes

B. Yes/Yes

An audit strategy can take _______. A. neither a reliance on controls approach, nor a substantive approach B. a reliance on controls approach, a substantive approach, or a combination of both C. a reliance on procedures approach, a substantive approach, or a combination of both D. an approach whereby only internal control is audited

B. a reliance on controls approach, a substantive approach, or a combination of both

The nature of an audit procedure refers to: A. the sample size required to perform the procedure. B. its purpose and its type. C. the assessed level of detection risk. D. when the procedure is performed.

B. its purpose and its type.

Estimation uncertainty is defined as _______. A. the uncertainty surrounding which staff members to assign to a particular audit B. the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement C. the susceptibility of an accounting estimate and related disclosures to be accurate D. the uncertainty surrounding the ultimate cost of the audit

B. the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement

The term "substantive" comes from _______. A. "insubstantial," which means auditors gather evidence to support only insubstantial transactions, account balances, and disclosures provided by management in the financial statements B. the fact that the audit report is designed to assist stockholders with substantial stock holdings in the client C. "substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements D. "insubstantial," which means auditors gather evidence to support the transactions, account balances, and disclosures provided by management in the financial statements

C. "substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should: A. Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing. B. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable. D. Obtain written representations from management that all financial records and related data will be made available.

C. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure? A. Rights and obligations. B. Completeness. C. Cutoff. D. Accuracy.

C. Cutoff.

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit? A. Analytical procedures are an inefficient means of obtaining assurance. B. The use of tests of controls should be considered without regard to the level of assurance required. C. The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment. D. Tests of details typically provide a low level of assurance.

C. The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.

Financial statements include _______. A. a variety of items that cannot be measured precisely and must be estimated by the internal auditors B. a variety of items that can be measured precisely and must be estimated by client management C. a variety of items that cannot be measured precisely and must be estimated by client management D. a variety of items that can be measured precisely and should not be estimated by client management

C. a variety of items that cannot be measured precisely and must be estimated by client management

Analytical procedures _______. A. are optional, and generally unnecessary if the system of internal control is strong B. are evaluations of financial information through analysis of plausible relationships using financial data only C. are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data D. are evaluations of financial information through analysis of plausible relationships using non-financial data only

C. are evaluations of financial information through analysis of plausible relationships among both financial and non-financial data

Designing substantive procedures responds to: A. the risk of all types of misstatements at the assertion level. B. the risk of material misstatement at the entity level. C. the risk of material misstatement at the assertion level. D. the risk of all types of misstatements at the entity level.

C. the risk of material misstatement at the assertion level..

An example of possible management bias would be _______. A. changes in the method of making the accounting estimate that are based on subjective assumptions B. using management's own assumptions for fair value estimates when they are inconsistent with readily observable market assumptions C. selecting or developing significant assumptions that yield an estimate more favorable for management's objectives D. All of these answer choices are correct.

D. All of these answer choices are correct.

The amount of estimation uncertainty is affected by _______. A. the nature of the accounting estimate B. the subjectivity of the assumptions used to make the estimate C. the extent to which a generally accepted method or model is available to aid in developing the estimate D. All of these answer choices are correct.

D. All of these answer choices are correct.

The types of substantive procedures discussed in this chapter include _______. A. Analytical procedures B. Substantive tests to follow-up on notable items identified when performing audit data analytics C. Tests of details of transactions and balances including audit data analytics (ADA) used as a substantive test D. All of these answer choices are correct.

D. All of these answer choices are correct.

Which of the following procedures would provide the most reliable audit evidence? A. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls. B. Audit evidence provided by copies is more reliable than that provided by facsimiles. C. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor. D. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources.

D. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources.

Which of the following procedures would provide the most reliable audit evidence? A. Inspection of prenumbered client purchase orders filed in the vouchers payable department. B. Analytical procedures performed by the auditor on the entity's trial balance. C. Inquiries of the client's internal audit staff held in private. D. Inspection of bank statements obtained directly from the client's financial institution.

D. Inspection of bank statements obtained directly from the client's financial institution.

Analytical procedures: A. are substantive procedures and cannot be used at any other stage of the audit. B. are used to test controls and are not substantive procedures. C. can be used as substantive tests but cannot be used as primary tests of a balance. D. are required during the planning and substantive testing phases of the audit.

D. are required during the planning and substantive testing phases of the audit.

Accounting estimates, by their nature _______. A. should not be estimated by management, but rather by the auditor at the end of the period B. should cause little or no variance at the end of the period C. involve objective decision making on the part of management D. involve subjective decision making on the part of management

D. involve subjective decision making on the part of management

If the control environment is assessed to be weak, _______. A. the auditors should immediately consider withdrawal from the engagement B. the auditors should plan to increase their reliance on the evidence generated by the system C. the auditors should plan to increase their reliance on the internal audit function D. the auditors should address this by changing the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client's locations

D. the auditors should address this by changing the audit plan to include more audit procedures and expanding the scope of the audit to include more of the client's locations

After auditors have completed testing controls and drawn a conclusion about control risk, _______. A. they should withdraw if control risk is assessed as high B. they are ready to issue the audit opinion C. they make decisions about the nature and timing of substantive testing D. they make decisions about the nature, timing, and extent of substantive testing

D. they make decisions about the nature, timing, and extent of substantive testing

The more judgment that is involved in conducting the substantive procedures and evaluating the results, the less documentation is needed. True False

False

When evidence is collected at an interim date, substantive tests are more effective. True False

False

Determining fair value of a transaction or financial statement item for inclusion in the financial statements is a type of accounting estimate. True False

True

If the assessed risk of material misstatement for an assertion is high, auditors need to gather more persuasive audit evidence. True False

True

When the entity's control environment has been assessed as effective, limited roll-forward procedures such as substantive analytical procedures are necessary. True False

True