Audit Exam 2 MC Questions
After obtaining an understanding of an entity's internal control system, an auditor may set control risk at high for some assertion because he or she a. Believes the internal controls are unlikely to be effective b. Determines that the pertinent internal control components are not well documented. c. Performs tests of controls to restrict detection risk to an acceptable level. d. Identifies internal controls that are likely to prevent material misstatements
a
An auditor is performing substantive procedures of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates that there may be numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate? a. Classical variables sampling b. Monetary-unit sampling c. Stop-n-go sampling d. Attribute sampling
a
In auditing a public company, Natalie, an auditor for N.M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of report should Natalie issue? a. An unqualified opinion b. An adverse opinion c. A disclaimer of opinion d. An exculpatory opinion
a
Samples to test internal controls are intended to provide a basis for an auditor conclude whether a. The controls are operating effectively b. The financial statements are materially misstated c. The risk of incorrect acceptance is too high d. Materiality for planning purposes is at a sufficiently low level
a
The risk of incorrect acceptance relates to the a. Effectiveness of the audit b. Efficiency of the audit c. Planning materiality d. Allowable risk of tolerable misstatement
a
When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why a. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded b. Deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions c. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatements at a higher rate d. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement
a
Which of the following is true relating to audit work paper documentation? a. It serves as the basis of review for audit supervisors to determine if sufficient, appropriate evidence has been gathered. b. It should not include copies of any client-generated documents. c. It is generally examined and utilized by the client after the audit is completed. d. It must be destroyed once the audit is complete and the opinion is rendered.
a
Which of the following most likely represents a weakness in internal control of an IT system? a. The systems analyst review output and controls the distribution of output from the IT department b. The accounts payable clerk prepares data for computer processing and enters the data into the computer c. The systems programmer designs the operating and control functions of programs and participates in testing operating systems d. The control clerk establishes control over data received by the IT department and reconciles control totals after processing
a
Which of the following statements concerning control deficiencies is true? a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit b. All significant deficiencies are material weaknesses c. All control deficiencies are significant deficiencies d. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the PCAOB
a
Which of the following statements concerning the auditor's use of statistical sampling is correct? a. An auditor needs to estimate the dollar amount of the standard deviation of the population in order to use classical variables sampling b. An assumption of monetary-unit sampling is that the underlying accounting population is normally distributed c. A classical variables sample needs to be designed with special considerations to include negative balances in the sample d. The selection of zero balances usually does not require special sample design considerations when using monetary-unit sampling
a
Which of the following statements is correct with regard to the quality or appropriateness of evidential matter? a. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. b. Evidential matter must be either valid or relevant but need not be both. c. Internal accounting data alone may be considered sufficient appropriate evidential matter to issue an unqualified opinion on financial statements. d. Appropriateness of evidential matter refers to the amount of corroborative evidence to be obtained.
a
An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n) a. Lead schedule b. Supporting schedule c. Audit control account d. Working trial balance
a.
Which of the following types of audit evidence is least reliable? a. Pre-numbered purchase order forms prepared by the entity. b. Bank statements obtained from the entity. c. Test counts of inventory performed by the auditor. d. Correspondence from the entity's attorney about litigation.
a.
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1 percent risk of assessing control risk too low for the assertion that not more than 7 percent of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2 percent of the sales invoices lacked approval. A sample of 200 invoices was examined, and 7 of them were lacking approval. The auditor then determined the computed upper deviation rate to be 8 percent. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a. Tolerable deviation rate (7 percent) was less than the computed upper deviation rate (8 percent) b. Expected population deviation rate (7 percent) was more than the percentage errors in the sample (3 1/2 percent) c. Computed upper deviation rate (8 percent) was more than the percentage of errors in the sample (3 1/2 percent) d. Expected population deviation rate (2 1/2 percent) was less than the tolerable deviation rate (7 percent) Based on the information above, the planned allowance for sampling risk was a. 5 1/2 percent b. 4 1/2 percent c. 3 1/2 percent d. 1 percent
a/b
A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a a. Deficiency in design b. Deficiency in operation c. Significant deficiency d. Material weakness
b
According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a high level of reliability is: a. Scanning. b. Recalculation. c. Observation. d. Confirmation.
b
An auditor's flowchart of an entity's accounting system is a diagrammatic representation that depicts the auditor's a. Program for tests of controls b. Understanding of the system c. Understanding of the types of fraud that are probable, given the present system d. Documentation of the study and evaluation of the system
b
Assessing control risk below high involves all of the following except a. Identifying specific controls to rely on. b. Concluding that controls are ineffective c. Performing tests of controls d. Analyzing the achieved level of control risk after performing tests of controls
b
Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence? a. Bank statements obtained from the entity. b. Computations made by the auditor. c. Pre-numbered entity sales invoices. d. Vendors' invoices included in the entity's files.
b
Considering each independently, a change in which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Misstatement Tolerable Misstatement a. NO NO b. YES YES c. NO YES d. YES NO
b
Discussions with the owner-manager of an entity under audit reveal to the auditor that the company is more concerned with minimizing its income tax payments than maximizing income. Based on this information, which management assertion will the auditor be most concerned about verifying with regard to sales revenue? a. Existence and occurrence b. Completeness c. Rights and obligations d. Valuation
b
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in Tolerable Misstatement/Increase in Assessed Level of Control Risk a. Decrease sample size/Decrease sample size b. Decrease sample size/Increase sample size c. Increase sample size/Decrease sample size d. Increase sample size/Increase sample size
b
If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment? a. Documentation and test controls over specific risks b. Self-assessment process in conjunction with entity-level controls c. Documentation and test entity-level controls over the entire entity d. Selective control test at that location
b
The following table depicts the possible outcomes for the auditor's estimated computed upper deviation rate based on a sample relative to the auditor's tolerable deviation rate (i.e, the compound upper deviation rate will either be above or below the tolerable deviation rate). The table also depicts the two possible states of the actual population deviation rate compared with the auditor's tolerable deviation rate (the actual population deviation rate is unknown to the auditor). AUD EST ACTUAL < TDR ACTUAL > TDR UDR < TDR 1 3 UDR > TDR 2 4 Suppose as a result of sample testing of controls, an auditor assesses control risk higher than necessary given the actual (but unknown) population deviation rate and thereby increases substantive testing. This is illustrated by which of the four possible outcome conditions in the table above? a. 1 b. 2 c. 3 d. 4
b
The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by a. Inspection of documents prepared by a third party but which contain the initials of those applying entity controls. b. Observation by the auditor of the employees performing control activities. c. Inspection of a flowchart of duties performed and available personnel d. Inquiries of employees who apply control activities
b
Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control? a. Inquiry of entity personnel. b. Reperformance of the control by the auditor c. Observation of entity personnel d. Walkthrough
b
An auditor would be least likely to use confirmations in connections with eh examination of a. Inventory held in a third-party warehouse b. Refundable income taxes c. Long-term debt d. Stockholders' equity
b.
The assurance bucket is filled with all of the following types of evidence except a. Test of controls b. The audit report c. Substantive analytical procedures d. Tests of details
b.
Which of the following presumptions is least likely to relate to the reliability of audit evidence? a. The more effective internal control, the more assurance it provides about the accounting data and financial statements. b. An auditor's opinion is formed within a reasonable time to achieve a balance between benefit and cost. c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. d. The independent auditor's direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly.
b.
Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? a. Reviewing standard bank confirmations for indications of cash manipulations b. Comparing a sample of shipping documents to related sales invoices c. Observing the entity's distribution of payroll checks d. Confirming a sample of recorded receivables by direct communication with the debtors
b.
Which of the following statements concerning audit evidence is correct? a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both. b. The measure of the reliability of audit evidence lies in the auditor's judgment. c. The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test. d. An entity's general ledger may be sufficient audit evidence to support the financial statements.
b.
According to the reliability hierarchy by evidence type as presented in the text, an example of audit evidence with a low level of reliability is: a. Reperformance. b. Inspection. c. Observation. d. Analytical procedures.
c
According to the text, each of the following is a main purpose for performing audit procedures except: a. To obtain an understanding of the entity and its environment. b. To test the operating effectiveness of controls. c. To develop recommendations for the control system. d. To detect material misstatements in the financial statements.
c
An advantage of statistical sampling over non statistical sampling is that statistical sampling helps an auditor to a. Eliminate the risk of nonsampling errors b. Reduce audit risk and materiality to a relatively low level c. Measure the sufficiency of the evidential matter obtained d. Minimize the failure to detect errors and fraud
c
AnnaLisa, an auditor for N.M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity's internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Lileah's internal control? a. An unqualified report b. An adverse report c. A disclaimer of opinion d. An exculpatory opinion
c
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is that a. The deviation rates of both the auditor's sample and the population exceed the tolerable deviation rate b. The deviation rates of both the auditor's sample and the population are less than the tolerable deviation rate c. The deviation rate in the auditor's sample is less than the tolerable deviation rate, but the deviation rate in the population exceeds the tolerable deviation rate d. The deviation rate in the auditor's sample exceeds the tolerable deviation rate, but the deviation rate in the population is less than the tolerable deviation rate
c
Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? a. Vendor confirmations of accounts payable balances. b. Copies of bank statements obtained from the entity under audit. c. Pre-numbered sales invoices. d. The opinion of an outside specialist regarding inventory valuation.
c
Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which on of the following is not an entity-level control? a. Controls to monitor results of operations b. Management's risk assessment process c. Controls to monitor the inventory taking process d. The period-end financial reporting process
c
In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor's report indicates that there are no material weaknesses in the foreign subsidiary's ICFR. What should Emily do? a. Disclaim an opinion because she cannot rely on the opinion of another auditor in dealing with a significant subsidiary b. Accept the other auditor's opinion and express an unqualified opinion, making no reference to the other auditor's report in her audit opinion c. Accept the other auditor's opinion after evaluating the auditor's work and make reference to the other auditor's report in her audit opinion d. Qualify the opinion because she is unable to conduct the testing herself, and this constitutes a significant scope limitation
c
In classical variables sampling, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor's needs in a given situation? a. The qualitative aspects of misstatements b. The total dollar amount of the population c. The acceptable level of risk d. The estimated percentage of deviations in the population
c
Regardless of the assessed level of control risk, an auditor would perform some a. Tests of controls to determine the effectiveness of internal controls b. Analytical procedures to verify the design of internal controls c. Substantive procedures to restrict detection risk for significant transaction classes d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk
c
Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they represent a. Material fraud or illegal acts perpetrated by high-level management b. Disclosures of information that significantly contradict the auditor's going concern assumption c. Significant deficiencies in the design or operation of internal control d. Potential manipulation or falsification of accounting records
c
Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent a. Disclosures of information that significantly contradict the auditor's going concern assumption b. Material fraud or illegal acts perpetrated by high-level management c. Significant deficiencies in the design or operation of the internal control d. Manipulation or falsification of accounting records or documents from which financial statements are prepared
c
Which of the following combinations results in the greater decrease in sample size in an attribute sample for a test of controls? Desired Confidence Level/Tolerable Deviation Rate/Expected Population Deviation Rate a. Decrease/Decrease/Increase b. Increase/Increase/Decrease c. Decrease/Increase/Decrease d. Decrease/Increase/Increase
c
Which of the following controls would most likely be tested during an interim period? a. Controls over non routine transactions b. Controls over the period-end financial reporting process c. Controls that operate on a continuous basis d. Controls over transactions that involve a high degree of subjectivity
c
Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? a. The susceptibility of the related assets or liability to loss or fraud b. The interaction or relationship of the control with other controls c. The financial statement amounts exposed to the deficiency d. The nature of the financial statement accounts, disclosures, and assertions involved
c
Which of the following is true regarding audit evidence? a. Auditors typically gather audit evidence about one whole financial statement at a time rather than one account at a time. b. Auditors rarely gather audit evidence about one business process at a time. c. Audit evidence is gathered to determine whether each relevant financial statement assertion is being supported. d. When audit evidence supports management's assertions, a qualified audit report can be issued.
c
Which of the following items is generally not included as part of audit documentation? a. Heading. b. Indexing. c. Client review notation. d. Tickmarks.
c
Which of the following presumptions is correct regarding the reliability of audit evidence? a. To be reliable, evidence should be convincing rather than simply persuasive. b. Information obtained directly from outside sources is considered to be the most reliable type of evidence. c. An effective internal control system provides increased assurance with regard to the reliability of audit evidence. d. Reliability generally refers to the amount and relevance of corroborative audit evidence obtained.
c
Which of the following primary assertions is satisfied when an auditor observes the entity's physical count of inventory? a. Valuation. b. Completeness. c. Existence. d. Rights and obligations.
c
Which of the following statements concerning monetary-unit sampling is correct? a. The sampling distribution should approximate the normal distribution b. Overstated units have a lower probability of sample selection than units that are understated c. The auditor controls the risk of incorrect acceptance by specifying the desired confidence level for the sampling plan d. The sampling interval is calculated by dividing the number of physical units in the population by the sample size
c
Which of the following would most likely to be an advantage in using classical variables sampling rather than monetary-unit sampling? a. An estimate of the standard deviation of the population's recorded amounts is not required b. The auditor rarely needs the assistance of a computer program to design an efficient sample c. Inclusion of zero and negative balances generally does not require special design considerations d. Any amount that is individually significant is automatically identified and selected
c
In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items b. Potentially unrecorded items to the financial statements c. Accounting records to the supporting documents d. Supporting documents in the accounting records
c.
The current file of the auditor's working papers should generally include a. A flowchart of the accounting system b. Organization charts c. A copy of the financial statements d. Copies of bond and note indentures
c.
The primary objective of final analytical procedures is to a. Obtain evidence from details tested to corroborate particular assertions. b. Identify areas that represent specific risks relevant to the audit. c. Assist the auditor in assessing the validity of the conclusions reached on the audit. d. Satisfy doubts when questions arise about an entity's ability to continue in existence.
c.
The substantive analytical procedure known as trend analysis is best described as a. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and non-financial data. b. Development of a model to form an expectation using financial data, non financial data, or both to test account balances or changes in account balances between accounting periods. c. The examination of changes in an account over time. d. The comparison of common-size financial statements over time.
c.
A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Greater reliance on internal controls b. Greater reliance on analytical procedures c. Smaller expected frequency of misstatements d. Smaller amount of tolerable misstatement
d
A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may a. Consider increasing the use of substantive tests of transactions in place of analytical procedures b. Substantive the accuracy of data through self-checking digits and hash totals c. Reduce the level of required tests of controls to a relatively small amount d. Access information stored on computer files while having a limited understanding of the entity's hardware and software features
d
A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to a. Tour the organization's facilities and locations before beginning any audit work b. Trace a transaction from every class of transactions from origination through the entity's information system c. Trace a transaction from each major class of transactions from origination through the entity's information system d. Trace a transaction from each major class of transaction from origination through the entity's information system until it is reflected in the entity's financial reports
d
An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus? a. Data capture controls b. Application controls c. Output controls d. General controls
d
An auditor's primary consideration regarding an entity's internal controls is whether they a. Prevent management override. b. Relate to the control environment. c. Reflect management's philosophy and operating style. d. Affect the financial statement assertions.
d
Assume an auditor is evaluating a statistical attribute sample of 50 items that resulted in three deviations. What should the auditor conclude if the tolerable deviation rate is 7 percent, the expected population deviation rate is 5 percent, an the allowance for sampling risk is 2 percent? a. The planned assessed level of control risk should be modified because the tolerable deviation rate plus the allowance for sampling risk exceeds the expected population deviation rate. b. The sample results should be accepted as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate. c. The sample results should be accepted as support for the planned assessed level of control risk because the tolerable deviation rate less the allowance rate for sampling risk equals the expected population deviation rate d. The planned assessed level of control risk should be modified because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable deviation rate
d
Audit documentation provides the principal support for which of the following? a. Demonstrate how the audit complied with auditing and related professional practice standards. b. Support the basis for the auditor's conclusions concerning every material financial statement assertion. c. Demonstrate that the underlying accounting records agreed or reconciled with the financial statements. d. All of the above.
d
Confirmations would normally be most likely used as a type of audit evidence in connection with which of the following? a. Goodwill. b. Deferred Taxes. c. Machinery and Equipment. d. Accounts Receivable.
d
Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective? a. Effectiveness and efficiency of operations. b. Reliability of financial reporting. c. Compliance with applicable laws and regulations. d. All of the above are correct.
d
Monitoring is a major component of the COSO Internal Control-Intengrated Framework. Which of the following is not correct in how the company can implement the monitoring component? a. Monitoring can be an ongoing process. b. Monitoring can be conducted as a separate evaluation. c. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs. d. The independent auditor can serve as part of the entity's control environment and continuous monitoring.
d
One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify: a. Transactions that have not been properly authorized. b. Illegal acts undetected as a result of poor internal controls. c. Inefficient operations. d. Unusual changes that may signal possible account misstatements.
d
SOC 1, Type 2 reports by the service organization's auditor typically a. Provide reasonable assurance that their financial statements are free of material misstatements b. Ensure that the entity will not have any misstatements in areas related to the service organization's activities c. Ensure that the entity is billed correctly d. Assess whether the service organization's controls are suitably designed and operating effectively
d
The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity's annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false? a. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively. b. Management's report should state its responsibility for establishing and maintaining an adequate internal control system. c. Management should identify material weaknesses in its report. d. The auditor should provide recommendations for improving internal control in the audit report.
d
When auditors report on the effectiveness of internal control "as of" a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period? a. Any significant changes that occurred in internal control subsequent to the interim date b. The length of the remaining period c. The specific controls tested prior to the "as of" date and the results of those tests d. The walkthrough of the control system conducted at interim
d
Which of the following audit procedures would most likely be used to test the mathematical accuracy of a five-hundred page inventory listing? a. Send confirmations to selected vendors to verify amounts. b. Examine a random sample of inventory documents. c. Manually foot, or sum, several randomly-selected pages. d. Use generalized audit software to foot, or sum, the entire listing.
d
Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value? a. Random sampling b. Numeric sampling c. Attribute sampling d. Variable sampling
d
Which of the following statements about internal control is correct? a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur. b. The establishment and maintenance of internal control is an important responsibility of the internal auditor. c. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance d. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.
d
Which of the following statements is correct concerning statistical sampling in tests of controls? a. Deviations from controls at a given rate usually result in misstatements at a higher rate b. As the population size doubles, the sample size should also double c. The qualitative aspects of deviations are not considered by the auditor d. There is an inverse relationship between the sample size and the tolerable deviation rate.
d
The permanent file section of the working papers that is kept for each audit client most likely contains a. Review notes pertaining to questions and comments regarding the audit work performed. b. A schedule of time spent on the engagement by each individual auditor. c. Correspondence with the entity's legal counsel concerning pending litigation. d. Narrative descriptions of the entity's accounting system and control procedures.
d.
