Chapter 6

Which of the following statements is the most correct regarding errors and fraud? A) An error is unintentional, whereas fraud is intentional. B) Auditors have more responsibility for finding fraud than errors. C) Errors are always fraud and frauds are always errors. D) Frauds occur more often than errors in financial statements.

A) An error is unintentional, whereas fraud is intentional.

________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions). A) Occurrence; completeness B) Accuracy; classification C) Completeness; occurrence D) Classification; accuracy

A) Occurrence; completeness

The objective of an audit of the financial statements is an expression of an opinion on A) the fairness of the financial statements in all material respects. B) the accuracy of the annual report. C) the accuracy of the balance sheet and income statement. D) the accuracy of the financial statements.

A) The fairness of the financial statements in all material respects.

An auditor discovers that the companyʹs bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of A) an error. B) a defalcation. C) employee fraud. D) misappropriation of assets

A) an error

International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements? A) assertions about the quality of source documents used to prepare the financial statements B) assertions about account balances at period end C) assertions about classes of transactions for the period under audit D) assertions about presentation and disclosure

A) assertions about the quality of source documents used to prepare the financial statements

When an auditor knows that an illegal act has occurred, she must A) consider the effects on the financial statements, including the adequacy of disclosure. B) withdraw from the engagement. C) issue an adverse opinion. D) report it to the proper governmental authorities

A) consider the effects on the financial statements, including the adequacy of disclosure.

Which of the following is not a step in the professional judgment process? A) determine the type of audit opinion B) review and document the rationale for the conclusion C) make the decision D) perform the analysis

A) determine the type of audit opinion

When comparing the auditorʹs responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility A) equally on discovering errors and employee fraud. B) on the senior auditor for detecting errors and on the manager for detecting employee fraud. C) more on discovering errors than employee fraud. D) more on discovering employee fraud than errors.

A) equally on discovering errors and employee fraud.

The classification balance-related audit objective A) involves determining if items included on a clientʹs listing are included in the correct general ledger accounts. B) involves tying in the account balances to the general ledger. C) involves determining if items included on a clientʹs listing are disclosed properly in the financial statements. D) is the counterpart to the management assertion of completeness.

A) involves determining if items included on a clientʹs listing are included in the correct general ledger accounts.

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to A) management. B) management for the statements and the auditor for the notes. C) both management and the auditor equally. D) the auditor.

A) management.

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected. A) material to the financial statements B) important to the financial statements C) identified by the client D) statistically significant to the financial statements

A) material to the financial statements

When an auditor believes that an illegal act may have occurred, the auditor should first A) obtain an understanding of the nature and circumstances of the act. B) discuss the matter with the audit committee. C) withdraw from the engagement. D) consult with legal counsel or others knowledgeable about the illegal act

A) obtain an understanding of the nature and circumstances of the act.

With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance. A) presentation and disclosure B) existence C) account balances D) classes of transactions

A) presentation and disclosure

Auditors accumulate evidence to A) reach a conclusion about the fairness of the financial statements. B) defend themselves in the event of a lawsuit. C) determine if the financial statements are correct. D) satisfy the requirements of the Securities Acts of 1933 and 1934.

A) reach a conclusion about the fairness of the financial

The procedures used to test the effectiveness of the internal controls are known as A) tests of controls. B) control risk. C) substantive analytical procedures. D) tests of transactions.

A) tests of controls

In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of A) the Securities Exchange Act of 1934. B) GAAP. C) the Sarbanes-Oxley Act. D) GAAS

A) the Securities Exchange Act of 1934

Which of the following statements is usually true? A) Materiality is easy to quantify. B) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements. C) Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement. D) Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion among management

B) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

Which of the following is an accurate statement about professional skepticism? A) It is easy for auditors to understand that their clients may try to deceive them throughout the audit process. B) Professional skepticism involves a critical assessment of the evidence. C) Professional skepticism is easy to implement in practice. D) Professional skepticism is only necessary for the audits of public companies

B) Professional skepticism involves a critical assessment of the evidence.

________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions. A) Autonomy B) Self-esteem C) Suspension of judgment D) Interpersonal understanding

B) Self-esteem

In describing the cycle approach to segmenting an audit, which of the following statements is not true? A) The ʺcapital acquisition and repaymentʺ cycle is closely related to the ʺacquisition of goods and services and paymentʺ cycle. B) The ʺinventory and warehousingʺ cycle may be audited at any time during the engagement since it is unrelated to the other cycles. C) All general ledger accounts and journals are included at least once. D) Some journals and general ledger accounts are included in more than one cycle.

B) The ʺinventory and warehousingʺ cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

Managementʹs disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion. A) rights and obligations B) accuracy and valuation C) existence D) completeness

B) accuracy and valuation

If a client has violated federal tax laws, A) the noncompliance generally will not impact the financial statements. B) and the amount is significant, the auditor should communicate with those charged with governance. C) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit. D) the auditor must notify the IRS

B) and the amount is significant, the auditor should communicate with those charged with governance.

When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will A) gather the facts. B) articulate in written form the rationale of their judgment. C) consider the accounting and auditing standards relevant to the issues. D) identify the issue.

B) articulate in written form the rationale of their judgment.

Which of the following is not one of the AICPA categories of assertions? A) assertions about classes of transactions and events for the period under audit B) assertions about financial statements and correspondence to GAAP C) assertions about presentation and disclosure D) assertions about account balances at period end

B) assertions about financial statements and correspondence

One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others. A) interpersonal understanding B) autonomy C) self-esteem D) suspension of judgment

B) autonomy

Misappropriation of assets A) causes the financial statements to be misstated since the misappropriation usually involves material amounts. B) causes harm to stockholders because the assets are no longer available to their rightful owners. C) harms the users of the financial statements by providing them incorrect financial data for their decision making. D) is generally committed by company management

B) causes harm to stockholders because the assets are no longer available to their rightful owners.

Management assertions are A) provided to the auditor in the assertions letter, but are not disclosed on the financial statements. B) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS. C) explicitly expressed representations about the financial statements. D) stated in the footnotes to the financial statements

B) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.

If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor A) should withdraw from the engagement. B) has the responsibility of notifying financial statement users through the auditorʹs report. C) should request an increase in audit fees so that more resources can be used to conduct the audit. D) should notify regulators of the circumstances

B) has the responsibility of notifying financial statement users through the auditorʹs report.

The starting point to effective professional judgment begins with A) gathering the facts. B) identifying and defining the issue. C) identifying relevant literature. D) identifying alternatives.

B) identifying and defining the issue.

Auditors have found that generally the most efficient and effective way to conduct audits is to A) obtain assurance about the ending balance of the account only. B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts. C) verify each entry that was made into an account. D) obtain complete assurance about the correctness of each class of transactions affecting the account.

B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.

When the auditor considers whether he understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he is performing which step in the professional judgment process? A) gathering the facts B) performing the analysis and identifying potential alternatives C) making the decision D) identifying and defining the issue

B) performing the analysis and identifying potential alternatives

Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective. A) completeness B) presentation and disclosure C) classification and understandability D) occurrence

B) presentation and disclosure

Balance-related audit objectives A) are never applied to income statement accounts. B) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances. C) can have only one specific-related audit objectives. D) are designed to detect fraud.

B) provide a framework to help the auditor accumulate sufficient appropriate evidence

Two overriding considerations affect the many ways an auditor can accumulate evidence: 1. Sufficient appropriate evidence must be accumulated to meet the auditorʹs professional responsibility. 2. Cost of accumulating evidence should be minimized. In evaluating these considerations A) it is impossible to prioritize them. B) the first is more important than the second. C) they are equally important. D) the second is more important than the first.

B) the first is more important than the second

Which of the following would most likely be deemed a direct effect illegal act? A) violation of civil rights laws B) violation of federal income tax laws C) violation of federal environmental regulations D) violation of federal employment laws

B) violation of federal income tax laws

________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value. A) Overconfidence B) Availability C) Anchoring D) Confirmation

C) Anchoring

Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? A) Accounting presentations contain complex estimates which involve uncertainty. B) The auditor commonly examines a sample, rather than the entire population of transactions. C) Auditors believe that reasonable assurance is sufficient in the vast majority of cases. D) Fraudulently prepared financial statements are often difficult to detect

C) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that A) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively. B) the transactions are related to financing a company rather than to its operations. C) Both A and B are correct. D) Neither A nor B is correct

C) Both A and B are correct.

Which of the following statements is not correct? A) There are many ways an auditor can accumulate evidence to meet overall audit objectives. B) It is appropriate to minimize the cost of accumulating evidence. C) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects. D) Sufficient appropriate evidence must be accumulated to meet the auditorʹs professional responsibility.

C) Gathering evidence and minimizing costs are equally important considerations that affect

Which of the following statements best describes the auditorʹs responsibility with respect to illegal acts that do not have a material effect on the clientʹs financial statements? A) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act. B) Generally, the auditor is obligated to disclose the relevant facts in the auditorʹs report. C) Generally, the auditor is under no obligation to notify parties other than personnel within the clientʹs organization. D) Generally, the auditor is under an obligation to inform the PCAOB.

C) Generally, the auditor is under no obligation to notify parties other than personnel within the clientʹs organization.

If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or A) Issue an adverse opinion; Issue a qualified opinion No No B) Issue an adverse opinion; Issue a qualified opinion No Yes C) Issue an adverse opinion; Issue a qualified opinion Yes Yes D) Issue an adverse opinion; Issue a qualified opinion Yes No

C) Issue an adverse opinion; Issue a qualified opinion Yes Yes

Why does the auditor divide the financial statements into segments around the financial statement cycles? A) The cycle approach is required by auditing standards. B) Most auditors are trained to audit cycles as opposed to entire financial statements. C) The approach aids in the assignment of tasks to different members of the audit team. D) The cycle approach allows the auditor to detect illegal acts

C) The approach aids in the assignment of tasks to different members of the audit team

Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions? A) Once the specific transaction-related audit objectives are established, they can be used to develop the general transaction-related objectives. B) The specific audit objectives are applicable to every class of transactions. C) The general audit objectives are applicable to every class of transactions. D) For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

C) The general audit objectives are applicable to every class of transactions.

Why does the auditor divide the financial statements into smaller segments? A) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces. B) The cycle approach is used because auditing standards require it. C) Using the cycle approach makes the audit more manageable. D) All of the above are correct

C) Using the cycle approach makes the audit more manageable.

An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and A) the assumption that all employees are motivated by greed. B) the assumption that upper-level management is dishonest. C) a critical assessment of the audit evidence. D) verification of all critical information by independent third parties

C) a critical assessment of the audit evidence.

Which balance sheet accounts are included in the payroll and personnel cycle? A) salaries and commissions, cash in bank, accrued payroll taxes B) accrued payroll, notes payable, and deferred tax C) accrued payroll, cash in bank, and accrued payroll taxes D) cash in bank, accrued payroll, trade accounts receivable

C) accrued payroll, cash in bank, and accrued payroll taxes

The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction-related audit objective? A) existence B) cut-off C) accuracy D) completeness

C) accuracy

If the auditor were responsible for making certain that all of managementʹs assertions in the financial statements were absolutely correct, A) bankruptcies could no longer occur. B) audits would be much easier to complete. C) audits would not be economically practical. D) bankruptcies would be reduced to a very small number.

C) audits would not be economically practical

If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor A) can write the engagement letter. B) needs to perform additional tests of controls so that the assurance level can be increased. C) can significantly reduce other substantive tests. D) can issue an unqualified opinion

C) can significantly reduce other substantive tests.

The most important general ledger account included in and affecting several cycles is the A) inventory account. B) retained earnings account. C) cash account. D) income tax expense and liability accounts

C) cash account.

Which of the following assertions is described as ʺthis assertion addresses whether all transactions that should be included in the financial statements are in fact includedʺ? A) rights and obligations B) occurrence C) completeness D) existence

C) completeness

The term audit objective refers to all of the following except for A) presentation and disclosure-related audit objectives. B) balance-related audit objectives. C) cycle-related audit objectives. D) transaction-related audit objectives

C) cycle-related audit objectives

The auditorʹs best defense when material misstatements are not uncovered is to have conducted the audit A) as effectively as reasonably possible. B) only after an adequate investigation of the management team. C) in accordance with generally accepted auditing standards. D) in a timely manner.

C) in accordance with generally accepted auditing standards.

When the auditor identifies or suspects noncompliance with laws and regulations, the auditor A) should withdraw from the engagement. B) should discuss the matter with those whom they believe committed the illegal act. C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence. D) begin communication with the FASB in accordance with PCAOB regulations

C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.

Auditing standards make ________ distinction(s) between the auditorʹs responsibilities for searching for errors and fraud. A) various B) a significant C) no D) little

C) no

The concept of reasonable assurance indicates that the auditor is A) responsible only for issuing an opinion on the financial statements. B) responsible for finding all misstatements. C) not a guarantor of the correctness of the financial statements. D) not responsible for the fairness of the financial statements

C) not a guarantor of the correctness of the financial statements

The provisions of many laws and regulations affect the financial statements A) materially if direct; immaterially if indirect. B) both directly and indirectly. C) only indirectly. D) directly.

C) only indirectly.

Which of the following management assertions is not associated with classes of transactions and events? A) occurrence B) classification C) rights and obligations D) accuracy

C) rights and obligations

Direct, written communication with the clientʹs customers to identify whether a receivable exists is an example of a(n) A) test of controls. B) analytical procedure. C) test of details of balances. D) substantive test of transactions

C) test of details of balances

If there is collusion among management, the chance a normal audit would uncover such acts is A) zero. B) very high. C) very low. D) none of the above

C) very low

Which of the following statements is not true? A) Transaction-related audit objectives are applied to classes of transactions. B) Balance-related audit objectives are applied to ending account balances. C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts. D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts

D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts

Which of the following statements is true of a public companyʹs financial statements? A) Sarbanes-Oxley requires only the CEO to certify the financial statements. B) Sarbanes-Oxley requires only the CFO to certify the financial statements. C) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements. D) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.

D) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements

________ are used as evidence to provide assurance about an account balance. A) Tests of details of balances B) Tests of transactions C) Audit risks D) Substantive analytical procedures

D) Substantive analytical procedures

Which of the following statements best describes the auditorʹs responsibility regarding the detection of fraud? A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter. B) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets. C) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued. D) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.

D) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.

Which of the following is an accurate statement concerning the auditorʹs responsibility to consider laws and regulations? A) It is the responsibility of the auditor to determine if an act constitutes noncompliance. B) The auditor must inform an outside party if management has knowingly not complied with a law or regulation. C) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements. D) The auditorʹs responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.

D) The auditorʹs responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.

One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious. A) an interpersonal understanding B) a questioning mindset C) self-esteem D) a search for knowledge

D) a search for knowledge

The posting and summarization audit objective is the auditorʹs counterpart to managementʹs assertion of A) completeness. B) occurrence. C) classification. D) accuracy

D) accuracy

When the auditor becomes aware of or suspects noncompliance with laws and regulations A) the auditor should discuss the matter with management at a level above those suspected of the noncompliance. B) the auditor should obtain additional information to evaluate the possible effects on the financial statements. C) the auditor should evaluate the effects of the noncompliance on other aspects of the audit. D) all of the above

D) all of the above

The detail tie-in objective is not concerned that the details in the account balance A) foot to the total in the account balance. B) agree with related subsidiary ledger amounts. C) agree with the total in the general ledger. D) are properly disclosed in accordance with GAAP.

D) are properly disclosed in accordance with GAAP.

If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the A) completeness assertion. B) cutoff assertion. C) existence assertion. D) classification assertion

D) classification assertion

Fraudulent financial reporting is most likely to be committed by whom? A) line employees of the company B) the companyʹs auditors C) outside members of the companyʹs board of directors D) company management

D) company management

The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the A) companyʹs internal audit department. B) board of directors. C) financial statement auditor. D) company management

D) company management

Another term for misappropriation of assets is A) illegal acts. B) collusion. C) management fraud. D) employee fraud

D) employee fraud

Management makes the following assertions about account balances: A) existence, completeness, classification and cutoff. B) existence, accuracy, classification and rights and obligations. C) existence, completeness, rights and obligations, and cutoff. D) existence, completeness, valuation and allocation, and rights and obligations

D) existence, completeness, valuation and allocation, and rights and obligations

In comparing management fraud with employee fraud, the auditorʹs risk of failing to discover the fraud is A) greater for employee fraud because of the larger number of employees in the organization. B) greater for management fraud because managers are inherently more deceptive than employees. C) greater for employee fraud because of the higher crime rate among blue collar workers. D) greater for management fraud because of managementʹs ability to override existing internal controls.

D) greater for management fraud because of managementʹs ability to override existing internal controls.

Which of the following is not one of the steps used to develop audit objectives? A) divide the financial statements into cycles B) know the management assertions about the financial statements C) know the specific audit objectives for classes of transactions D) know the proper type of audit opinion to issue

D) know the proper type of audit opinion to issue

A questioning mindset A) means the auditor should approach the audit with a ʺdo not trust anyoneʺ mental outlook. B) means the auditor must prove every statement that management makes to them. C) assures that the auditor will only accept honest clients. D) means the auditor should approach the audit with a ʺtrust but verifyʺ mental outlook.

D) means the auditor should approach the audit with a ʺtrust but verifyʺ mental outlook.

An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should A) design audit tests to detect unrecorded transactions. B) not rely on internal controls that are designed to prevent or detect errors or fraud. C) extend the work to audit the majority of the recorded transactions and records of an entity. D) plan and perform the engagement with an attitude of professional skepticism.

D) plan and perform the engagement with an attitude of professional skepticism.

An auditor has a duty to A) be equally responsible with management for the preparation of the financial statements. B) be an insurer of the fairness in the statements. C) be a guarantor of the fairness in the statements. D) provide reasonable assurance that material misstatements will be detected

D) provide reasonable assurance that material misstatements will be detected

When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor A) has no responsibility to determine if any violations of these laws has occurred. B) should perform the same procedures as for violations having a direct effect on the financial statements. C) must report all violations, including inconsequential violations, to the audit committee. D) should inquire of management about whether the entity is in compliance with such laws and regulations.

D) should inquire of management about whether the entity is in compliance with such laws and regulations.

When reporting identified or suspected noncompliance, A) any intentional noncompliance must be reported to local law enforcement. B) all noncompliance, whether material or not, must result in a disclaimer of opinion. C) the auditor must report inconsequential noncompliance to the audit committee. D) the auditor should communicate all material noncompliance matters to those charged with governance.

D) the auditor should communicate all material noncompliance matters to those charged with governance.

After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on A) the AICPAʹs Code of Professional Conduct. B) generally accepted auditing standards. C) generally accepted accounting principles. D) the auditorʹs professional judgment

D) the auditorʹs professional judgment

The cycle approach to auditing A) cannot combine transactions recorded in different journals with the general ledger balances that result from those transactions. B) is the only way of segmenting an audit. C) assumes that each account has two or more cycles associated with it. D) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.

D) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.

The detail tie-in is part of the ________ assertion for account balances. A) completeness B) rights and obligations C) classification D) valuation and allocation

D) valuation and allocation

In testing for cutoff, the objective is to determine A) the proper cutoff between disclosing items in footnotes or in account balances. B) the proper cutoff between capitalizing and expensing expenditures. C) whether all of the current periodʹs transactions are recorded. D) whether transactions are recorded in the correct accounting period.

D) whether transactions are recorded in the correct accounting period.