Chapters 6, 7, 9, and 10

Diageo made improper cash payments to government officials in Mexico, Brazil, and Argentina during the period of 2003-2009, which violated provisions of the Foreign Corrupt Practices Act. (T/F)

FALSE

In developing an audit approach, if the risk of material misstatement is assessed low, the auditor can plan more substantive testing, or can be less flexible about when the procedures are applied. (T/F)

FALSE

It is not possible for internal controls to mitigate risks associated with the valuation of accounts receivable. (T/F)

FALSE

Planning analytical procedures for cash balances are highly effective because of the generally stable relationship with past cash levels and the fact that cash is a managed account. (T/F)

FALSE

Responding to identified risks in the revenue cycle rarely involves developing an audit approach that contains substantive procedures (e.g., tests of details, and, when appropriate, substantive analytical procedures). (T/F)

FALSE

Short selling enables managers to get away with perpetrating fraud undetected and undeterred. (T/F)

FALSE

A substantive audit procedure that would reveal ownership and related disclosure issues includes scanning the cash receipts journal for relatively large inflows of cash that come from unusual sources. (T/F)

TRUE

An audit program can be used to record the audit work performed and identify those responsible for performing the work. (T/F)

TRUE

Research indicates that a majority of financial statement frauds involve inappropriate recording of revenue. (T/F)

TRUE

Some level of control risk is always present in an organization because of the inherent limitations of internal control. (T/F)

TRUE

The appropriateness of audit evidence refers to its relevance and reliability. (T/F)

TRUE

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

TRUE

Evidence that is obtained directly from the client is usually considered more reliable than evidence obtained from a source independent of the client. (T/F)

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

The auditor should use a standardized audit program, without any modifications, for all clients. (T/F)

FALSE. Most audit firms have standardized audit programs that should be modified to fit a client's unique features, including risk factors.

The revenue cycle involves receiving a customer's order, approving credit for a sale, determining whether the goods are available for shipment, shipping the goods, billing the customer, collecting cash, and recognizing the effect of this process on revenue and other related accounts such as accounts receivable, inventory, and sales commission expense. (T/F)

TRUE

When testing for existence, the auditor will vouch recorded transactions. (T/F)

TRUE

A fake cash problem relates to management's cash valuation assertion. (T/F)

FALSE

A primary concern for the auditor for related-party transactions is whether undisclosed related-party relationships and transactions exist. (T/F)

TRUE

Which of the following statements is FALSE regarding the fraud at ArthroCare? a. Two of ArthroCare's sales executives overstated ending inventory that improperly inflated company revenue and earnings. b. PricewaterhouseCoopers' audit was deficient for ArthroCare, thereby enabling the fraud to go undetected for a period of time. c. ArthroCare agreed to pay a $30 million fine to resolve the investigation. d. ArthroCare is a manufacturer of medical devices, based in Austin, Texas, whose shares are traded on NASDAQ.

a. Two of ArthroCare's sales executives overstated ending inventory that improperly inflated company revenue and earnings.

Skimming most likely results in a violation of which of the following management assertions? a. Existence. b. Completeness. c. Rights and obligations. d. Valuation. e. All of the above.

b. Completeness.

Which of these is a control related to existence or occurrence? a. Limiting access to the files to authorized individuals. b. Distributing monthly statements. c. Printing a list of changed prices for review by the department that authorized the changes. d. Use of prenumbered shipping documents and sales invoices.

b. Distributing monthly statements.

Which of the following statements is FALSE regarding the nature, timing, and extent of risk responses? a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance. b. The timing of risk response refers to when the auditor performs the audit procedures. c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year-end, on an unannounced basis, and includes more elements of unpredictability in the procedures. d. The extent of risk response refers to the sufficiency of evidence that is necessary given the client's assessed risks, materiality, and the acceptable level of audit risk.

c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year-end, on an unannounced basis, and includes more elements of unpredictability in the procedures.

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 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.

Which of the following statements regarding reperformance of bank reconciliations is TRUE? a. The auditor's reperformance of a reconciliation of the client's bank accounts provides evidence as to the accuracy of the year-end cash balance. b. The process reconciles the balance per the bank statements with the balance per the books. c. Reperformance of the bank reconciliation is ineffective in detecting major errors, such as those that might be covered up by omitting or underfooting outstanding checks. d. Two of the above (a-c) are true. e. All of the above (a-c) are true.

e. All of the above (a-c) are true.

Affirmative answers to which of the following questions would lead the auditor to assess fraud risk at a higher level for cash? a. Is an individual with access to cash or its recording experiencing financial or personal distress? b. Is an individual with access to cash or its recording being compensated at an amount that he or she might consider low? c. Is the company in potential violation of its debt covenants? d. Two of the above (a-c). e. All of the above (a-c).

e. All of the above (a-c).

A high level of detection risk means that the audit firm is willing to accept a low risk of not detecting a material misstatement. (T/F)

FALSE

Auditors all agree that controls do not need to be reperformed unless there is evidence that the control procedures are not operating effectively. (T/F)

FALSE

Auditors in practice commonly use negative confirmations. (T/F)

FALSE

Because a primary concern is that cash will be stolen and thus understated, the auditor is NOT usually concerned about overstatements of cash. (T/F)

FALSE

Because of the level of inherent risk associated with cash accounts, auditors are required to test the controls over cash accounts. (T/F)

FALSE

Channel stuffing is a fraud in the revenue cycle that involves recording revenue after a customer has requested to purchase the inventory. (T/F)

FALSE

Controls for completeness of cash are important because they help to provide reasonable assurance that the cash exists. (T/F)

FALSE

Detection risk is the susceptibility of an assertion to a material misstatement before consideration of related controls. (T/F)

FALSE

Surprisingly, AmTrust's restatement was followed by a stock price increase, likely because investors inferred that by revealing the restatement the company could move forward with confidence. (T/F)

FALSE

The auditor bases materiality solely on quantitative factors. (T/F)

FALSE

The following is a reasonable test of control over marketable securities: Inquire of management about its process for establishing valuation of marketable securities and review related documentation. (T/F)

FALSE

The nature of risk response refers to the sufficiency and appropriateness of evidence that is necessary given the risk of material misstatement and the level of acceptable audit risk. (T/F)

FALSE

The volume of activity in cash accounts makes cash less susceptible to error than most other accounts. (T/F)

FALSE

When an auditor is seeking confirmation from a customer about an account receivable, the request should always be directed to the customer's accounts payable department. (T/F)

FALSE

When performing planning analytical procedures, the auditor could perform trend analysis with ratios, but not with account balances. (T/F)

FALSE

As part of the audit documentation, auditors should maintain copies of all client documents reviewed during the audit. (T/F)

FALSE. Audit documentation should be prepared in sufficient detail to provide a clear understanding of its purpose, source, and the other conclusions reached.

All audit procedures need to be performed at or after the client's balance sheet date. (T/F)

FALSE. Because the decision of timing is based on the assessment of risk associated with the account, the effectiveness of internal controls, the nature of the account, and the availability of staff.

Substantive analytical procedures are required on every audit. (T/F)

FALSE. Both U.S. and international auditing standards allow the auditor the option of performing substantive analytical procedures; they are not required.

Skimming occurs when an employee purchases merchandize and records the sale at an unauthorized discounted price. (T/F)

FALSE. Skimming occurs when an employee makes a sale but does not record it, and steals the cash.

The sufficiency of evidence is a measure of evidence quality. (T/F)

FALSE. Sufficiency of audit evidence is a measure of quantity of audit evidence.

When the auditor uses the work of an auditor specialist, the auditor's responsibility for the audit opinion is reduced. (T/F)

FALSE. The auditor still has the ultimate responsibility for the audit opinion.

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

FALSE. We don't rely on what management has done. The auditor should recalculate the estimate then the auditor should compare the differences to tolerate misstatement to determine if the account is materially misstated or materially stated.

A typical bank statement prepared at an interim agreed-upon date and sent directly to the auditor is a bank transfer statement. (T/F)

FASLE

Because cash balances are usually relatively low at year-end, auditing standards encourage auditors to send bank confirmations on a sample basis. (T/F)

FASLE

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

TRUE

An example of a monitoring control in cash would include a review of cash budgets and a comparison of them with actual cash balances, with appropriate follow-up. (T/F)

TRUE

Auditor expertise is critically important in evaluation the validity of the valuation of complex financial instruments. (T/F)

TRUE

For accounts receivable, the more relevant assertions are usually existence and valuation. (T/F)

TRUE

If the auditor observes that the company reports consistent profits over several years while cash inflows are decreasing, the auditor should likely assess a heightened risk of fraud in cash. (T/F)

TRUE

If the contract stipulates more than one deliverable, the client must allocate a separate price to each deliverable. (T/F)

TRUE

In assessing fraud risk related to cash, auditors engage in brainstorming to consider incentives, opportunities to commit fraud, and rationalization about risks relating to cash. (T/F)

TRUE

In testing controls over whether sales are properly valued, the auditor could take a sample of recorded sales invoices and agree the price on the invoice to an authorized price list. (T/F)

TRUE

In the revenue cycle, the most significant account typically include revenue and accounts receivable. (T/F)

TRUE

One of the most rigorous approached to substantive analytical procedures is regression analysis. (T/F)

TRUE

One step an auditor can take to recognize fraud risk is to consider the fact that not all fraud is instigated by management. (T/F)

TRUE

Performance materiality is an amount less than overall materiality and helps the auditor determine the extent of the audit evidence needed. (T/F)

TRUE

The auditor might conclude that a heightened risk of fraud exists if the planning analytical procedures indicate increases in revenue and net income, but negative cash flow from operations. (T/F)

TRUE

The auditor should document significant issues that were identified and how they were resolved. (T/F)

TRUE

The electronic transfer of cash and the automated controls over cash are such that if error are built into computer programs, they could be repeated on a large volume of transactions. (T/F)

TRUE

The following is an inherent risk that is particularly applicable to owning stock in a company like Genie Energy: Risk of sudden market declines, which would adversely affect the valuation of securities. (T/F)

TRUE

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

TRUE

The relative percentage of substantive analytics that an auditor will use as evidence in the audit of cash will be somewhat limited regardless of the riskiness of the client. (T/F)

TRUE

When assessing fraud risks, the auditor should consider the client's motivation to increase revenue due to both internal and external pressures. (T/F)

TRUE

When auditing cash, the auditor will perform a relatively larger percentage of tests of details for a high-risk client compared to a low-risk client. (T/F)

TRUE

When relying on the work of a specialist, the auditor should evaluate the professional qualifications of the specialist. (T/F)

TRUE

When testing management estimates, the auditor should understand the process that management uses to develop estimates. (T/F)

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. (T/F)

TRUE

When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable. (T/F)

TRUE

While audit firms may have a standardized audit program for the revenue cycle, the auditor should customize the audit program based on the assessment of risk of material misstatement. (T/F)

TRUE

Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash as high. This client has incentives to overstate cash in order to meet debt covenants. Further, the client has relatively weak controls to prevent theft of cash. a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls.

a. 100% tests of details.

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 balance? 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 solely 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.

Which of the following questions would be relevant for an inherent risk analysis related to cash? a. Does the company have significant cash flow problems in meeting its current obligations on a timely basis? b. Are cash transactions properly authorized? c. Are bank reconciliations performed on a timely basis by personnel independent of processing? d. Does the internal audit department conduct timely reviews of the cash management and cash-handling process? e. All of the above.

a. Does the company have significant cash flow problems in meeting its current obligations on a timely basis?

Which of these is NOT a potential fraud risk in the revenue cycle? a. Excessive cash flow from operating activities when income from operating activities has been reported. b. Sales to customers in the last month of the fiscal period at terms more favorable than previous months. c. Customer complaints and discrepancies in accounts receivable confirmations. d. Large or unusual adjustments to sales accounts just prior to or just after the fiscal year-end.

a. Excessive cash flow from operating activities when income from operating activities has been reported.

For which of the following audit judgements 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 explanations best describes the purpose of lapping? a. Lapping is a technique used by client personnel to cover up the embezzlement of cash. b. Lapping is an approach used by client personnel to eliminate difference between a customer's records and the client's records reported on confirmations. c. Lapping is a procedure used by the auditor to obtain evidence the client's customer does not return on a positive confirmation. d. Lapping is an agreement containing contract terms that are not part of a formal sales contract.

a. Lapping is a technique used by client personnel to cover up the embezzlement of cash.

Which of the following statements is TRUE concerning performance materiality? a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence to obtain. b. If performance materiality is set too low, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. c. If performance materiality is set too high, the auditor might perform more substantive procedures than necessary. d. Performance materiality is essentially the same as overall materiality.

a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence to obtain.

The auditor is concerned that the client has recored fictitious sales. Which of the following procedures would be the best audit procedure to identify the fictitious sales? a. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods. b. Select a random sample of shipping documents (bills of lading) and trace to the sales invoice to determine whether the invoice was properly recorded. c. Select a sample of customer purchase orders and trace through to the generation of a sales invoice. d. Select a sample of customer purchase orders to determine whether a valid customer actually exists.

a. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods.

The first step in performing planning analytical procedures is to develop an expectation of the account balance. Which of the following does NOT typically represent a likely expected relationship for cash accounts? a. The company reports consistent profits over over several years, but operating cash flows are declining. b. No unusual large cash or other liquid asset transactions are found. c. Operating cash flow is not significantly different from that of the prior year. d. Investment income is consistent with the level and returns expected from the investments. e. All of the above represent likely expected relationships.

a. The company reports consistent profits over over several years, but operating cash flows are declining.

Assume that an auditor expected that the client's activities related to sales and accounts receivable would be similar to industry averages. Which of the following relationships detected as part of planning analytical procedures would NOT suggest a heightened risk of material misstatement in the revenue cycle? a. The number of days' sales in accounts receivable decreased from 65 days in the prior year to 47 days in the current year. The industry average increased from 45 to 47 days. b. The gross margin increased from 16.7% to 18.3% while the industry average changed from 16.7% to 16.3%. c. Accounts receivable increased 35% over the prior year, while sales stayed relatively stable. d. All of the above relationships are suggestive of a heightened risk of fraud.

a. The number of days' sales in accounts receivable decreased from 65 days in the prior year to 47 days in the current year. The industry average increased from 45 to 47 days.

After identifying the risks of material misstatement, the auditor develops an audit plan in response to those risks. Which of the following plans for testing revenue would be most likely when the auditor believes that control risk is high? a. The only evidence the auditor plans to obtain is from tests of details. b. The auditor plans to obtain 40% of the necessary audit evidence from tests of controls, and the remaining 60% from substantive analytical procedures. c. The auditor plans to obtain the majority of the necessary audit evidence from tests of controls. d. Any of the above would be an appropriate audit plan if the auditor believes that control risk is high.

a. The only evidence the auditor plans to obtain is from tests of details.

A bank confirmation contains which of the following two parts? 1. A part that seeks information on the client's deposit balances, the existence of loans, due dates of the loans, interest rates, dates through which interest has been paid, and collateral for loans outstanding. 2. A part that contains a listing of the last checks issued near year-end. 3. A part that seeks information about any loan guarantees. 4. A part that lists all transfers between the company's bank accounts for a short period of time before and after year-end. a. 1 & 2. b. 1 & 3. c. 2 & 3. d. 2 & 4. e. 3 & 4.

b. 1 & 3.

Which of the following procedures can organizations use to address credit risk most effectively? a. An informal credit policy, which may be automated for most transactions, but requires special approval for large and/or unusual transactions. b. A periodic review of the credit policy by key executives to determine whether changes are dictated either by current economic events or by the deterioration of the receivables. c. Periodic monitoring of receivables for evidence of increased risk, such as increases in the number of days past due or an unusually high concentration in a few key customers whose financial prospects are declining. d. Adequate segregation of duties over fixed assets, which specific authorization to write off fixed assets that have been fully depreciated.

b. A periodic review of the credit policy by key executives to determine whether changes are dictated either by current economic events or by the deterioration of the receivables.

An audit client has invested heavily in new equity and debt securities. Which of the following would NOT be constitute an appropriate role for the organization's board of directors or others charged with governance? a. Receive and review periodic reports by the internal audit function on compliance with the organization's investment policies and procedures. b. Approve all new investments prior to reviewing their risks. c. Review and approve written policies and guidelines for investments in marketable securities. d. Periodically review the risks inherent in the portfolio of marketable securities to determine whether the risk is within parameters deemed acceptable by the board.

b. Approve all new investments prior to reviewing their risks.

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 principal support for the audit opinion expressed by the auditor. c. Audit documentation would identify who reviewed the work but not who performed the audit work. d. Documentation must be in paper format.

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

Refer to Exhibit 10.15. Which of the following assertions is relevant to whether the marketable securities balances include all securities transactions that have taken place during the period? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.

b. Completeness.

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.

b. Develop an understanding of management's process for developing the estimate.

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.

Which of the following statements is TRUE regarding assertions in the revenue cycle? a. It is typical that all five assertions for revenue are equally important. b. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion. c. Audit evidence about the existence of revenues is also the most appropriate evidence about the valuation of receivables. d. The allowance for doubtful accounts has important implications for the ownership assertion of accounts receivable.

b. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion.

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. 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.

An auditor performs tests of controls in the revenue cycle. First, the auditor makes inquiries of company personnel about credit-granting policies. The auditor then selects a sample of sales transactions recorded in the general ledger and examines documentary evidence of credit approval. Which of the financial statement assertion(s) does this test of controls most likely support? (Completeness; Valuation or Allocation) a. Yes; Yes b. No; Yes c. Yes; No d. No; No

b. No; Yes

Refer to Exhibit 10.6 Which of the following represents a reasonable test of controls for cash receipts? a. Document internal controls over cash by completing the internal control questionnaire or by flowcharting the process. b. Segregation of duties between those handling cash and those recording cash transactions. c. Obtain a bank confirmation. d. Obtain a bank cutoff statement. e. All of the above.

b. Segregation of duties between those handling cash and those recording cash transactions.

Which of the following statements about the Medicis fraud is FALSE? a. In 2012, the PCAOB settled a disciplinary order censuring Ernst & Young (EY), imposing a $2 million penalty against the firm and sanctioning four of its current and former partners. b. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements - its allowance for doubtful accounts. c. EY did not properly evaluate Medicis' practice of reserving for most of its estimated product returns at replacement cost, instead of at gross sales price. It appears that EY accepted the company's basis for reserving at replacement cost, when the auditors should have known that this approach would not be supported by the audit evidence. d. The PCAOB investigation revealed that by using replacement cost for the reserve, rather than gross sales price, Medicis' reported sales returns reserve were materially understated and its reported revenue was materially overstated. e. All of the above are true.

b. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements - its allowance for doubtful accounts.

Responding to identified risks involves developing an audit approach that addresses those risks. Which of the following statements about the planned audit approach is TRUE for the revenue cycle? a. The audit approach needs to include tests of controls, substantive analytical procedures, and tests of details. b. The audit approach will typically require more evidence for higher risk areas than lower risk areas. c. The audit approach should follow the audit firm's standardized audit program. d. The sufficiency and appropriateness of selected procedures will not vary across assertions.

b. The audit approach will typically require more evidence for higher risk areas than lower risk areas.

Under the FASB's guidance on revenue recognition, which of the following is NOT a criteria that must be met in order for a contract to exist? a. The parties have approved it. b. The auditor has ensured that the contract's valuation is reasonable in all material respects. c. The goods and/or services involved are clearly identified. d. The payment terms are spelled out. e. There is commercial value to the contract.

b. The auditor has ensured that the contract's valuation is reasonable in all material respects.

The auditor is testing the completeness assertion. Which of the following statements is TRUE regarding the auditor's work? 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 these is NOT a reason why management might decide to fraudulently overstate revenue? a. To achieve bonuses or stock options tied to revenue. b. To discourage investors from investing in the company. c. To be able to negotiate a higher price in a merger. d. Bankruptcy is imminent.

b. To discourage investors from investing in the company.

Which mix of evidence would be most appropriate for the following scenario? This is a client where the auditor has assessed the risk of material misstatement related to the existence and completeness of cash as low, and believes that the client has implemented effective controls in this area. a. 100% tests of details. b. 70% tests of details, 10% analytics, 20% tests of controls. c. 50% tests of details, 10% analytics, 40% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls.

c. 50% tests of details, 10% analytics, 40% tests of controls.

Which of the following statements represents the appropriate directional relationships? a. As inherent risk increases, audit risk increases. b. As inherent risk increases, audit risk decreases. c. As control risk increases, detection risk decreases. d. As control risk increases, inherent risk decreases.

c. As control risk increases, detection risk decreases.

Which of the following items would typically not be included in the heading of a workingpaper? 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 is NOT a type of common control over cash? a. Segregation of duties. b. Restrictive endorsements of customer checks. c. Bank reconciliations by employees who handle cash. d. Prenumbered cash receipt documents and turn-around documents. e. Two of the above (a-d).

c. Bank reconciliations by employees who handle cash.

To test the completeness of sales, the auditor would select a sample of transactions from which of the following populations? a. Customer order file. b. Open invoice file. c. Bill of lading file. d. Sales invoice file.

c. Bill of lading file.

Which of the following factors in NOT a motivation for clients to fraudulently misstate revenue? a. Bankruptcy may be imminent. b. Management bonuses are contingent on a certain revenue goal. c. Controls over revenue process are ineffective. d. Management wants to meet publicly announced earnings expectations.

c. Controls over revenue process are ineffective.

Which of these is NOT a control over the shipment and reconciling of sales transactions that an auditor might examine to assess whether all transactions are recorded correctly and in the correct period? a. Signed authorization of transactions before recorded. b. Use and reconciliation of pre-numbered documents. c. Distribute monthly statements. d. Supervisory review of transactions before recording.

c. Distribute monthly statements.

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 controls risks. d. None of the above statements are true.

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

Refer to Exhibit 10.15. Which of the following assertions is relevant to the audit procedure for marketable securities that requires the auditor to examine selected documents to identify any restrictions on the securities? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.

c. Rights and obligations.

Which of the following assertions is relevant to whether the company owns the cash accounts as of the balance sheet date? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.

c. Rights and obligations.

Assume that the auditor sets audit risk at 1%. What is the appropriate interpretation of this level of audit risk? a. The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement. b. The auditor is 99% confident that the audit procedures will detect a material misstatement. c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated. d. The auditor is 99% confident that the audit opinion is correct.

c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated.

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 related-party transactions.

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

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 the tests of details. c. The auditor would perform substantive analytical procedures after tests of details. d. All of the above statements are true.

c. The auditor would perform substantive analytical procedures after tests of details.

Which of the following statements is FALSE regarding planning analytical procedures? a. The precision of the auditor's expectation tends to be less precise, and based on more aggregated data, for planning analytical procedures than for substantive analytical procedures. b. The objective for planning analytical procedures is to identify accounts with heightened risk of misstatement to provide a basis for designing and implementing responses to the assessed risks. c. For planning analytical procedures, significant unexpected differences suggest that the auditor will need to increase substantive procedures. d. A frequently used planning analytical procedure is regression analysis.

d. A frequently used planning analytical procedure is regression analysis.

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 misstatements for auditors.

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

Which of the following is a risk associated with complex financial instruments? a. Management's objective for entering into such transactions may relate to misstating the financial statements. b. Most of these financial instruments have a high volume of activity and relate to deep capital markets. c. Most management teams today have the necessary sophistication to invest in complex financial instruments with relatively little downside risk. d. All of the above are risks.

d. All of the above are risks.

When auditing a nonpublic company, the auditor would generally make a decision NOT to test the operating effectiveness of controls in which of the following situations? a. The preliminary assessment of control risk is at the maximum. b. It is more cost efficient to directly test ending account balances than to test controls. c. The auditor believes that controls are designed effectively, but are not operating as described. d. All of the above are situations when the auditor would likely not test the operating effectiveness of controls.

d. All of the above are situations when the auditor would likely not test the operating effectiveness of controls.

Which of the following statements is FALSE regarding planning analytical procedures in the revenue cycle? a. As revenue is typically regarded as a high-risk account, planning analytical procedures related to revenue are not required. b. The first step in planning analytical procedures including developing an expectation of recorded amounts or ratios, and evaluating whether that expectation is precise enough to accomplish the relevant objective. c. Trend analysis would not be appropriate as a planning analytical procedure in the revenue cycle. d. All of the above statements are false.

d. All of the above statements are false.

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 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 work paper heading. d. All of the above would typically be included in an audit program.

d. All of the above would typically be included in an audit program.

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. d. All of the above.

d. All of the above.

Which of these is NOT a factor that influences the reliability of data used in planning analytical procedures in the revenue cycle? a. The source of the data and the nature of information available about the data. b. The comparability of the data. c. The controls over the preparation of the data. d. All of these are factors that influence the reliability of this data.

d. All of these are factors that influence the reliability of this data.

Which of the following statements is TRUE regarding materiality? a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. b. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it possible that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. c. A fact is material if there is substantial likelihood that a reasonable investor would have reviewed the fact as having significantly altered the total mix of information made available. d. Both (a) and (c) are correct. e. Both (b) and (c) are correct.

d. Both (a) and (c) are correct.

Which of the following terms best defines the following scenario? The employee steals a payment from Customer X. To cover the theft, the employee applies a payment from Customer Y to Customer X's account. Before Customer Y has time to notice that its account has not been appropriately credited, the employee applies a payment from Customer Z to Customer Y's account. a. Skimming. b. Kiting. c. Collateralizing. d. Lapping.

d. Lapping.

Which of the following statements is TRUE regarding the processing and recording of revenue transactions? a. The accurate recording of revenue transactions is important for preparing financial statements, but not important for the client's management decisions. b. Invoices should be prepared once the client determines that the goods ordered by a customer are available. c. A bill of lading provides documentation that the customer has received the goods. d. Sales transactions typically begin with the receipt of a purchase order from a customer.

d. Sales transactions typically begin with the receipt of a purchase order from a customer.

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 the audit costs to a minimum. b. Internal control risk is high, and therefore it is not efficient to test controls. c. Planning 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 assertions is relevant to whether the cash balances reflect the true underlying economic value of those assets? a. Existence/occurrence. b. Completeness. c. Rights and obligations. d. Valuation or allocation. e. All of the above.

d. Valuation or allocation.

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 is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts? a. Compare monthly cash balances with past years and budgets. b. Identify unexpected spikes or lows in cash during the year. c. Compute trends in interest returns on investments. d. Two of the above (a-c). e. All of the above (a-c).

e. All of the above (a-c).

Which of the following represents a control related to cash that an auditor might test? a. Reviews of reconciliations of reported cash receipts with remittances prepared by independent parties. b. Reviews of cash budgets and comparison of them with actual cash balances. c. Review of discrepancies in cash balances. d. Two of the above (a-c). e. All of the above (a-c).

e. All of the above (a-c).

Inherent risk for cash is usually assessed as high for which of the following reasons? a. The volume of transactions flowing through cash accounts throughout the year makes the account more susceptible to error. b. The cash account is more susceptible to fraud because cash is liquid and easily transferable. c. The electronic transfer of cash and the automated controls over cash are such that if errors are built into computer programs, they will be repeated on a large volume of transactions. d. Cash is easily manipulated. e. All of the above.

e. All of the above.