Chapter 6 questions

Which of the following is a reason that accounts containing management estimates pose a high level of risk of material misstatement for auditors? a. Accounting estimates are especially susceptible to management bias. b. Accounting estimates are a means for management to manage or misstate the financial statements. c. Accounting estimates are sensitive to variations in management assumptions. d. All of the above are reasons that accounts containing management estimates pose a high level of risk of material misstatement for auditors.

d. All of the above are reasons that accounts containing management estimates pose a high level of risk of material misstatement for auditors.

Which of the following factors affects the relevance of audit evidence? a. The purpose of the audit procedure. b. The direction of testing. c. The type of procedure. d. All of the above factors affect the relevance of audit evidence.

d. All of the above factors affect the relevance of audit evidence.

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 the above statements describe the purpose of an audit program.

d. All of the above statements describe the purpose of an audit program.

Which of the following statements best describes what is meant by the term appropriateness of audit evidence? a. Appropriateness is a measure of the quality of audit evidence. b. Appropriateness refers to the relevance and reliability of audit evidence. c. Appropriateness is a measure of the quantity of audit evidence. d. Both a. and b.

d. Both a. and b.

Analytical procedures are best used as a substantive audit procedure in which of the following scenarios? a. The auditor's primary objective is to reduce audit costs to a minimum. b. Internal control risk is high, and therefore it is not efficient to test controls. c. Preliminary analytical procedures indicate that misstatements are likely to occur in significant account balances. d. Substantive analytical procedures would not be appropriate in any of the above scenarios.

d. Substantive analytical procedures would not be appropriate in any of the above scenarios.

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. A debt-related transaction between an entity and one of its SPEs. c. An exchange of property between an entity and a joint venture in which the entity has part ownership. d. Writing-off obsolete inventory prior to year end.

d. Writing-off obsolete inventory prior to year end.

Which of the following statements is true regarding audit documentation? a. Auditors document only those significant issues that have not been resolved by the audit report date. b. Audit documentation provides the principal support for the audit opinion expressed by the auditor. c. Audit documentation would identify who reviewed the audit work, but not who performed the audit work. d. Documentation must be in paper format.

b. Audit documentation provides the principal support for the audit opinion expressed by the auditor.

Which of the following statements is true regarding the sufficiency of evidence needed to test an account? a. Evidence sufficiency is a measure of evidence quality. b. Evidence sufficiency is affected by the quality of evidence. c. A relationship does not exist between evidence sufficiency and evidence quality. d. For a specific client, evidence sufficiency will be the same across all accounts.

b. Evidence sufficiency is affected by the quality of evidence.

The auditor wishes to gather 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. Inspection of documents, including the lease contract and recalculation of capitalized amount and current amortization. c. Confirmation of the current purchase price for similar equipment with vendors. d. Confirmation of the original cost of the equipment with the lessor.

b. Inspection of documents, including the lease contract and recalculation of capitalized amount and current amortization.

The auditor wishes to test the completeness assertion. Which of the following statements is true regarding the auditor's work flow? a. The auditor would take a sample of recorded transactions and obtain supporting documentation for those transactions. b. The auditor would perform a process referred to as tracing. c. The auditor would take a sample of source documents and obtain additional supporting documents for those transactions. d. For a sample of items recorded in the sales journal, the auditor would obtain the related shipping documents and customer orders.

b. The auditor would perform a process referred to as tracing.

Which of the following items would typically not be included in an audit program? a. A list of audit procedures to be performed. b. An indication of who performed the procedure. c. A workpaper heading. d. All of the above would typically be included in an audit program.

c. A workpaper heading

Which of the following items would typically not be included in the heading of a workpaper? a. Client name. b. Client balance sheet date. c. Audit firm name. d. A descriptive explanatory title.

c. Audit firm name.

Which of the following statements is true regarding the relationship between risk and evidence sufficiency for substantive tests? a. Evidence sufficiency will be affected by inherent risk, but not control risk. b. Evidence sufficiency will be affected by control risk, but not inherent risk. c. Evidence sufficiency will be affected by both inherent and control risks. d. None of the above statements are true.

c. Evidence sufficiency will be affected by both inherent and control risks.

Which of the following statements is true regarding the auditor's use of the work of a specialist? a. The specialist, not the auditor, is responsible for evaluating whether the specialist's findings support the assertions in the financial statements. b. Because the individual is considered a specialist, the auditor does not need to evaluate the professional qualifications of the specialist. c. The auditor should obtain an understanding of the methods and assumptions used by the specialist. d. All of the above statements are true.

c. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

Which of the following statements is most accurate regarding the auditor's primary focus on a client's related-party transactions? a. The auditor wants reasonable assurance that all related-party transactions are accounted for differently than transactions with unrelated parties. b. The auditor will want to confirm the existence of the related parties. c. The auditor wants reasonable assurance that all related-party transactions have been appropriately disclosed. d. The auditor will focus on verifying the valuation of the relatedparty transactions.

c. The auditor wants reasonable assurance that all related-party transactions have been appropriately disclosed.

The sufficiency of audit evidence is affected by which of the following factors? a. The reliability of the audit evidence. b. The relevance of the audit evidence gathered. c. The risk of material misstatement of the assertion being examined. d. All of the above.

c. The risk of material misstatement of the assertion being examined.

A standardized audit program, without any modifications, should be used for each client

false

As part of the audit documentation, auditors should maintain copies of all client documents reviewed during the audit.

false

Because management estimates are often subjective, the auditor does not need to test these estimates, but can rely solely on management's work.

false

When the auditor uses the work of a specialist, the auditor's responsibility for the audit opinion is reduced.

false

A primary concern for the auditor for related-party transactions is whether undisclosed related-party relationships and transactions exist.

true

A procedure that involves only inspection of documentation is usually considered to be of lower quality than a procedure involving reperformance.

true

An audit program can be used to record the audit work performed and identify those responsible for performing the work.

true

Substantive analytical procedures are required on every audit.

true

The auditor may be able to use generalized audit software to identify transactions that have been entered into with related parties.

true

The auditor should document significant issues that were identified and how they were resolved.

true

The quantity of audit evidence needed when testing an account will be influenced by the risk of material misstatement in that account.

true

When relying on the work of a specialist, the auditor should evaluate the professional qualifications of the specialist.

true

When testing for existence, the auditor will vouch recorded transactions.

true

When testing management estimates, the auditor should understand the process that management uses to develop its estimates.

true

When testing the operating effectiveness of a control, the frequency with which the control is performed will influence the sample size to be used by the auditor.

true

Refer to Exhibit 6.1. Auditing standards require the auditor to gather sufficient appropriate evidence to ensure that the auditor has a reasonable basis for an opinion regarding the financial statements. What are the characteristics of (a) sufficient audit evidence and (b) appropriate audit evidence? How are sufficiency and appropriateness related?

A. Audit evidence is the evidence collected by the auditor in the course of an audit to provide a basis to the opinions he has formed on the financial statements. There are two basis characteristics of audit evidence, viz. appropriateness and sufficiency. B. Appropriateness- Appropriateness of audit evidence is a measure of the quality of audit evidence collected by the auditor in the course of the audit. The quality of audit evidence depends on the relevance and reliability of the audit evidence. C. Appropriateness and sufficiency of audit evidence is inter-connected by the various risks involved in the audit of the specific assertion. Therefore, the risk associated with a specific account or assertion influences both the appropriateness and sufficiency of the evidence collected.

All audit procedures need to be performed at or after the client's balance sheet date.

False

Evidence that is obtained directly from the client is usually considered more reliable than evidence obtained from a source independent of the client.

False

The sufficiency of evidence is a measure of evidence quality.

False

One of the most rigorous approaches to substantive analytical procedures is regression analysis.

True

The appropriateness of audit evidence refers to its relevance and reliability.

True

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 regarding the account balances? a. 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. b. Direct evidence of account balances is not needed. c. Direct evidence can be obtained through analytical procedures. d. Direct evidence should be obtained for all accounts, regardless of the auditor's assessment of control risk.

a. 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.

For which of the following audit judgments would an auditor be least likely to use an audit specialist? a. Existence of cash. b. Valuation of works of art. c. Valuation of oil and gas reserves. d. Interpretation of laws and regulations.

a. Existence of cash.

Which of the following procedures would an auditor typically perform first when assessing the reasonableness of management's estimate of its pension liability? a. Inspect documentation related to the pension transactions that the client has recorded. b. Develop an understanding of management's process for developing the estimate. c. Identify sensitive management assumptions. d. Review transactions occurring prior to the report release date to assess the reasonableness of management estimates.

a. Inspect documentation related to the pension transactions that the client has recorded.

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 evidence needed from tests of details can likely be reduced. c. Substantive analytical procedures would be performed after tests of details. d. All of the above statements are true.

a. Substantive analytical procedures are not required to be performed on all audit engagements.