Chapter C4 MCQS

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? 0.20. 0.00. 0.10. 0.75.

0.10.

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? Multiple Choice 0.75. 0.20. 0.00. 0.10.

0.10.

Analytical procedures used when planning an audit should concentrate on: Multiple Choice Management assertions in financial statements. Predictability of account balances based on individual significant transactions. Accounts and relationships that can represent specific potential problems and risks in the financial statements. Weaknesses in the company's internal control activities.

Accounts and relationships that can represent specific potential problems and risks in the financial statements.

Analytical procedures used when planning an audit should concentrate on: Multiple Choice Weaknesses in the company's internal control activities. Management assertions in financial statements. Predictability of account balances based on individual significant transactions. Accounts and relationships that can represent specific potential problems and risks in the financial statements.

Accounts and relationships that can represent specific potential problems and risks in the financial statements.

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? Bad debt expense. Inventory. Accounts receivable. Correct Cost of goods sold.

Accounts receivable.

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"? Multiple Choice Inventory. Cost of goods sold. Accounts receivable. Bad debt expense.

Accounts receivable.

Analytical procedures can be used in which of the following ways? Multiple Choice As a means of overall review near the end of the audit. As "attention-directing" methods when planning an audit at the beginning. As substantive audit procedures to obtain evidence during an audit. All of the choices are correct.

All of the choices are correct.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: Multiple Choice An error in recording amortization of the excess of the investor's cost over the investment's underlying book value. An error in recording the unrealized gain from an increase in the fair value of available for sale securities in the income account for trading securities. The investee's decision to reduce cash dividends declared per share of its common stock. A substantial fluctuation in the price of the investee's common stock on a national stock exchange.

An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: Multiple Choice An error in recording the unrealized gain from an increase in the fair value of available for sale securities in the income account for trading securities. The investee's decision to reduce cash dividends declared per share of its common stock. An error in recording amortization of the excess of the investor's cost over the investment's underlying book value. A substantial fluctuation in the price of the investee's common stock on a national stock exchange.

An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

It is acceptable under generally accepted auditing standards for an audit team to: Multiple Choice Assess inherent risk at zero and perform a minimum of detection work. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. Decide that audit risk can be 40 percent. Assess control risk at zero and perform a minimum of detection work.

Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.

It is acceptable under generally accepted auditing standards for an audit team to: Multiple Choice Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. Decide that audit risk can be 40 percent. Assess inherent risk at zero and perform a minimum of detection work. Assess control risk at zero and perform a minimum of detection work.

Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests.

What is the primary objective of the fraud brainstorming session? Multiple Choice Determine audit risk and materiality. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives. Assess the potential for material misstatement due to fraud. Identify whether analytical procedures should be applied to the revenue accounts.

Assess the potential for material misstatement due to fraud.

What is the primary objective of the fraud brainstorming session? Multiple Choice Determine audit risk and materiality. Identify whether analytical procedures should be applied to the revenue accounts. Determine whether the planned procedures in the audit plan will satisfy the general audit objectives. Assess the potential for material misstatement due to fraud.

Assess the potential for material misstatement due to fraud.

A primary objective of analytical procedures used in the final review stage of an audit is to: Multiple Choice Assist the auditor in evaluating the overall financial statement presentation. Detect fraud that may cause the financial statements to be misstated. Identify account balances that represent specific risks relevant to the audit. Gather evidence from tests of details to corroborate financial statement assertions.

Assist the auditor in evaluating the overall financial statement presentation.

A primary objective of analytical procedures used in the final review stage of an audit is to: Multiple Choice Gather evidence from tests of details to corroborate financial statement assertions. Assist the auditor in evaluating the overall financial statement presentation. Detect fraud that may cause the financial statements to be misstated. Identify account balances that represent specific risks relevant to the audit.

Assist the auditor in evaluating the overall financial statement presentation.

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation? Multiple Choice Auditors must design tests to detect all material noncompliance that indirectly affects the financial statements. Auditors must design tests to detect all noncompliance that directly affects the financial statements. The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation? Multiple Choice The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. Auditors must design tests to detect all material noncompliance that indirectly affects the financial statements. Auditors must design tests to detect all noncompliance that directly affects the financial statements. Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

Auditors must design tests to obtain reasonable assurance that all noncompliance with direct material financial statement effects is detected.

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to: Multiple Choice Change from 0.2 to 0.3. Change from 0.25 to 0.1. Correct Be unchanged. Change from 0.1 to 0.04.

Change from 0.25 to 0.1.

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to: Multiple Choice Change from 0.25 to 0.1. Change from 0.2 to 0.3. Be unchanged. Change from 0.1 to 0.04.

Change from 0.25 to 0.1.

Which of the following relationships between types of analytical procedures and sources of information are most logical? Type of Analytical ProcedureSource of Informationa.Comparison of current account balances with prior periodsPhysical production statisticsb.Evaluation of current account balances with relation to predictable historical patternsPublished industry ratiosc.Evaluation of current account balances with relation to predictable historical patternsCompany's own comparative financial statementsd.Comparison of current account balances with expected balancesCompany's budgets and forecasts

Choice d

Which of the following relationships between types of analytical procedures and sources of information are most logical? Type of Analytical ProcedureSource of Informationa.Comparison of current account balances with prior periodsPhysical production statisticsb.Evaluation of current account balances with relation to predictable historical patternsPublished industry ratiosc.Evaluation of current account balances with relation to predictable historical patternsCompany's own comparative financial statementsd.Comparison of current account balances with expected balancesCompany's budgets and forecasts Multiple Choice Choice a Choice b Choice c Choice d

Choice d

An audit committee is: Multiple Choice Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company. Composed of internal auditors. Composed of members of the audit team. A committee composed of persons not associating in any way with the client or the board of directors.

Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

An audit committee is: Multiple Choice Composed of members of the audit team. A committee composed of persons not associating in any way with the client or the board of directors. Composed of internal auditors. Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

Composed of members of a company's board of directors who are not involved in the day-to-day operations of the company.

When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will: Multiple Choice Decrease. Not be able to be determined with the information provided. Increase. Remain unchanged.

Decrease.

When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will: Multiple Choice Not be able to be determined with the information provided. Increase. Decrease. Correct Remain unchanged.

Decrease.

The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is: Multiple Choice Inherent risk. Control risk. Audit risk. Detection risk. Correct

Detection risk.

The risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is: Multiple Choice Inherent risk. Detection risk. Control risk. Audit risk.

Detection risk.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? Multiple Choice Detection. Sampling. Inherent. Control.

Detection.

Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? Multiple Choice Sampling. Control. Detection. Inherent.

Detection.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to: Evaluate the effect of the noncompliance on the financial statements. Recommend remedial actions to the audit committee. Determine whether to contact law enforcement officials. Determine whether other similar acts could have occurred.

Evaluate the effect of the noncompliance on the financial statements.

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to: Multiple Choice Recommend remedial actions to the audit committee. Determine whether other similar acts could have occurred. Evaluate the effect of the noncompliance on the financial statements. Determine whether to contact law enforcement officials.

Evaluate the effect of the noncompliance on the financial statements.

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? Multiple Choice Key factors that are consistent with prior periods. Evidence of a conservative systematic bias. Assumptions that are similar to industry guidelines. Measurements that are objective and not susceptible to bias.

Evidence of a conservative systematic bias.

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? Multiple Choice Measurements that are objective and not susceptible to bias. Key factors that are consistent with prior periods. Assumptions that are similar to industry guidelines. Evidence of a conservative systematic bias.

Evidence of a conservative systematic bias.

Auditors perform analytical procedures in the planning stage of an audit for the purpose of: Multiple Choice Identifying unusual conditions that deserve more auditing effort. Deciding the matters to cover in an engagement letter. Determining which of the financial statement assertions are the most important for the client's financial statements. Determining the nature, timing, and extent of further audit procedures for auditing the inventory.

Identifying unusual conditions that deserve more auditing effort.

Auditors perform analytical procedures in the planning stage of an audit for the purpose of: Multiple Choice Identifying unusual conditions that deserve more auditing effort. Determining which of the financial statement assertions are the most important for the client's financial statements. Determining the nature, timing, and extent of further audit procedures for auditing the inventory. Deciding the matters to cover in an engagement letter.

Identifying unusual conditions that deserve more auditing effort.

The risk of material misstatement is composed of which audit risk components? Multiple Choice Control risk and detection risk. Inherent risk and control risk. Inherent risk, control risk, and detection risk. Inherent risk and detection risk.

Inherent risk and control risk.

The risk of material misstatement is composed of which audit risk components? Multiple Choice Control risk and detection risk. Inherent risk, control risk, and detection risk. Inherent risk and detection risk. Inherent risk and control risk

Inherent risk and control risk.

Auditors are not responsible for accounting estimates with respect to: Multiple Choice Determining that estimates are adequately disclosed in the financial statements. Determining the reasonableness of estimates. Determining that estimates are presented in conformity with GAAP. Making the estimates.

Making the estimates.

Auditors are not responsible for accounting estimates with respect to: Multiple Choice Determining that estimates are adequately disclosed in the financial statements. Determining the reasonableness of estimates. Making the estimates. Determining that estimates are presented in conformity with GAAP.

Making the estimates.

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? Multiple Choice Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud. Studying management's selection and application of accounting principles more carefully. Exercising more professional skepticism. Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.

Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.

Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? Multiple Choice Exercising more professional skepticism. Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis. Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud. Studying management's selection and application of accounting principles more carefully.

Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.

Analytical procedures are generally used to produce evidence from: Multiple Choice Confirmations mailed directly to the auditors by client customers. Physical observation of inventories. Relationships among current financial balances and prior balances, forecasts, and nonfinancial data. Correct Detailed examination of external, external-internal, and internal documents.

Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Analytical procedures are generally used to produce evidence from: Multiple Choice Detailed examination of external, external-internal, and internal documents. Physical observation of inventories. Relationships among current financial balances and prior balances, forecasts, and nonfinancial data. Confirmations mailed directly to the auditors by client customers.

Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Auditing standards do not require auditors of financial statements to: Multiple Choice Design audits to provide reasonable assurance of detecting errors and frauds. Assess the risk of occurrence of errors and frauds. Report all errors and frauds found to police authorities. Understand the nature of errors and frauds.

Report all errors and frauds found to police authorities.

Auditing standards do not require auditors of financial statements to: Understand the nature of errors and frauds. Assess the risk of occurrence of errors and frauds. Report all errors and frauds found to police authorities. Correct Design audits to provide reasonable assurance of detecting errors and frauds.

Report all errors and frauds found to police authorities.

Under the Private Securities Litigation Reform Act, independent auditors are required to first: Multiple Choice Report clearly inconsequential noncompliance with the Act to the audit committee of the client's board of directors. Report in writing all instances of noncompliance with the Act to the client's board of directors. Resign from the audit engagement and report the instances of noncompliance with the Act to the SEC. Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

Under the Private Securities Litigation Reform Act, independent auditors are required to first: Multiple Choice Resign from the audit engagement and report the instances of noncompliance with the Act to the SEC. Report clearly inconsequential noncompliance with the Act to the audit committee of the client's board of directors. Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC. Report in writing all instances of noncompliance with the Act to the client's board of directors.

Report to the SEC all instances of noncompliance with the Act they believe have a material effect on financial statements if the board of directors does not first report to the SEC.

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as: Inherent risk. Control risk. Detection risk. Risk of material misstatement.

Risk of material misstatement.

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as: Multiple Choice Control risk. Risk of material misstatement. Inherent risk. Detection risk.

Risk of material misstatement.

An audit strategy memorandum contains: Multiple Choice Documentation of the assertions under audit, the evidence obtained, and the conclusions reached. Specifications of auditing standards relevant to the financial statements being audited. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. Specifications of procedures the auditors believe appropriate for the financial statements under audit.

Specifications of procedures the auditors believe appropriate for the financial statements under audit.

An audit strategy memorandum contains: Multiple Choice Specifications of auditing standards relevant to the financial statements being audited. Specifications of procedures the auditors believe appropriate for the financial statements under audit. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached.

Specifications of procedures the auditors believe appropriate for the financial statements under audit.

Which of the following circumstances would most likely cause an audit team to perform extended procedures? Multiple Choice The company has recently hired a new chief financial officer after the previous one retired. Supporting documents are produced when requested. The company maintains several different petty cash funds. The client made several large adjustments at or near year-end.

The client made several large adjustments at or near year-end.

Which of the following circumstances would most likely cause an audit team to perform extended procedures? The client made several large adjustments at or near year-end. Correct The company maintains several different petty cash funds. The company has recently hired a new chief financial officer after the previous one retired. Supporting documents are produced when requested.

The client made several large adjustments at or near year-end.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? Multiple Choice The entity's financial data is available only in computer-readable form. The entity's financial statements are generated at an outside service center. The entity enters into significant derivative transactions as hedges. The entity's fiscal year ends on June 30.

The entity enters into significant derivative transactions as hedges.

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit? Multiple Choice The entity's financial data is available only in computer-readable form. The entity's fiscal year ends on June 30. The entity's financial statements are generated at an outside service center. The entity enters into significant derivative transactions as hedges.

The entity enters into significant derivative transactions as hedges.

One of the typical characteristics of management fraud is: Falsification of documents in order to misappropriate funds from an employer. Victimization of investors through the use of materially misleading financial statements. Correct Conversion of stolen inventory to cash deposited in a falsified bank account. Illegal acts committed by management to evade laws and regulations.

Victimization of investors through the use of materially misleading financial statements.

One of the typical characteristics of management fraud is: Multiple Choice Conversion of stolen inventory to cash deposited in a falsified bank account. Victimization of investors through the use of materially misleading financial statements. Illegal acts committed by management to evade laws and regulations. Falsification of documents in order to misappropriate funds from an employer.

Victimization of investors through the use of materially misleading financial statements.