Chapter 5
An advantage of data analytical approaches applied to auditing is that A. Auditing of entire populations of transactions may, in particular situations, become cost justified. B. The legal situation in the United States makes it clear that such an approach will lead to less liability for auditors. C. Such approaches eliminate the need for auditor professional skepticism. D. Such approaches generally result in the analysis of far fewer transactions than do traditional sampling approaches.
A
An auditor is performing an analytical procedure that involves developing common-size financial statements. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.
A
Auditors can mitigate risk, like the failure to detect material dollar errors in the financial statements, by doing what? A. Performing substantive procedures. B. Performing tests of controls. C. Assessing control risk. D. Obtaining a client representation letter.
A
Examination of large data sets to uncover hidden patterns is often referred to as: A. Data analytics. B. Analysis review procedures. C. Tests of controls. D. Artificial analytical review.
A
The management representation letter date should coincide with the: A. Date of the auditor's report. B. Balance sheet date. C. Date of the latest subsequent event referred to in the notes to the financial statements. D. Date of the engagement agreement.
A
What type of transactions ordinarily have high inherent risk because they involve management judgments or assumptions in formulating accounting balances? A. Estimation B. Nonroutine C. Qualified D. Routine
A
Which of the following best describes the problem with the use of published industry averages for analytical procedures? A. Lack of comparability. B. Lack of sufficiency. C. Lack of accuracy. D. Lack of availability.
A
The inspection of a vendor's invoice by the auditors is: A. Direct evidence about occurrence of a transaction. B. Physical evidence about occurrence of a transaction. C. Documentary evidence about occurrence of a transaction. D. Part of the client's accounting system.
C
Which procedure is not a typical analytical procedure? A. Study of relationships of the financial information with relevant nonfinancial information. B. Comparison of the financial information with similar information regarding the industry in which the entity operates. C. Comparison of recorded amounts of major disbursements with appropriate invoices. D. Comparison of the financial information with budgeted amounts.
C
An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the: A. Acquisition date of the asset. B. Audit report date. C. Expected replacement date of the asset. D. Measurement date (ordinarily the date of the financial statements).
D
Concerning retention of working papers, the Sarbanes-Oxley Act: A. Has no provisions. B. Requires permanent retention. C. Requires retention for at least 7 years. D. Requires retention for a period of 4 or less years.
C
Confirmation would be most effective in addressing the existence assertion for the: A. Addition of a milling machine to a machine shop. B. Payment of payroll during regular course of business. C. Inventory held on consignment. D. Granting of a patent for a special process developed by the organization.
C
Working papers used by the auditor that record the procedures used to gather evidence should be: A. Considered the primary support for the financial statements being examined. B. Viewed as the connecting link between the books of account and the financial statements. C. Designed to meet the circumstances of the particular engagement. D. Destroyed when the audited entity ceases to be a client.
C
In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are A. Prepared in a satisfactory control environment. B. Consistent with industry guidelines. C. Based on verifiable objective assumptions. D. Reasonable in the circumstances.
D
Based on the previous information, which of the following preliminary conclusions can the auditor use as a basis for further investigations? A. Sales per store are directly related to the size of the store. B. Sale clerks are less productive in larger size stores. C. Gross margin is directly related to the size of the store. D. Average square feet of store correlates with the number of stores in the district.
A
Financial statement assertions are established for classes of transactions: A. Account Balances and Disclosures B. Account Balances C. Disclosures D. Neither
A
In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence? A. A price for a similar asset obtained from an active market. B. An appraisal obtained discounting future cash flows. C. Management's judgment of the cost to purchase an equivalent asset. D. The historical cost of the asset.
A
In general, which of the following statements is correct with respect to ownership, possession, or access to working papers prepared by a CPA firm in connection with an audit? A. The working papers may be obtained by third parties where they appear to be relevant to issues raised in litigation. B. The working papers are subject to the privileged communication rule which, in a majority of jurisdictions, prevents third-party access to the working papers. C. The working papers are the property of the client after the client pays the fee. D. The working papers must be retained by the CPA firm for a period of ten years.
A
In obtaining sufficient appropriate audit evidence, the work of which type or types of specialists may be relied upon? A. Client Engaged and Auditor Engaged B. Client Engaged C. Auditor Engaged D. Neither
A
When using management's written representations as audit evidence about the completeness assertion, an auditor should consider that such representations: A. Complement, but do not replace, substantive procedures designed to support the assertion. B. Constitute sufficient evidence to support the assertion when considered in combination with a moderate assessed level of control risk. C. Are generally sufficient audit evidence to support the assertion regardless of the assessed level of control risk. D. Replace the assessed level of control risk as evidence to support the assertions.
A
Which of the following is generally true about the sufficiency of audit evidence? A. The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement. B. The amount of evidence concerning a particular account varies inversely with the materiality of the account. C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account. D. When evidence is appropriate with respect to an account it is also sufficient.
A
A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount, is referred to as a: A. Supporting schedule. B. Lead schedule. C. Corroborating schedule. D. Reconciling schedule.
B
Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Observation of procedures. B. Review of management's process of development. C. Independent development of an estimate. D. Review of subsequent events.
A
Which of the following is not considered to be an analytical procedure? A. Comparisons of financial statement amounts with source documents. B. Comparisons of financial statement amounts with nonfinancial data. C. Comparisons of financial statement amounts with budgeted amounts. D. Comparisons of financial statement amounts with comparable prior year amounts.
A
Which of the following statements regarding audit evidence is generally correct? A. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources. B. To be appropriate, audit evidence must be sufficient. C. Accounting data alone may be considered sufficient appropriate audit evidence to issue an unqualified opinion on financial statements. D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
A
Which transaction would not necessarily be considered a related party transaction? A. Payment of a bonus to the president. B. Purchases from another corporation that is controlled by the corporation's chief stockholder. C. Loan from the corporation to a major stockholder. D. Sale of land to the corporation by the spouse of a director.
A
An auditor is performing an analytical procedure that involves comparing a client's account balances over time. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.
B
An independent auditor finds that the Simmer Corporation purchased land owned by an officer of the company for an amount in excess of its asking price. This finding indicates the existence of: A. Management fraud. B. Related party transactions. C. Window dressing. D. Weak internal control.
B
An unexpected economic downturn is likely to have which effect on inventory turnover. A. Increase B. Decrease C. No effect D. Each of these replies is equally likely
B
Comparing the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable during an audit would be a type of: A. Test of transactions. B. Analytical procedure. C. Test of controls. D. Test of details.
B
During financial statement audits, auditors seek to restrict which type of risk? A. Control risk. B. Detection risk. C. Inherent risk. D. Account risk.
B
The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? A. 5% B. 12.5% C. 42.7% D. 60%
B
The auditors use analytical procedures during the course of an audit. The most important phase of performing these procedures is the: A. Vouching of all data supporting various ratios. B. Investigation of significant variations and unusual relationships. C. Comparison of client-computed statistics with industry data on a quarterly and full-year basis. D. Recalculation of industry date.
B
The components of the risk of misstatement are: A. Inherent Risk, Control Risk, Detection Risk B. Inherent Risk and Control Risk C. Inherent Risk D. Control Risk and Detection Risk
B
The date on which no information may be deleted from audit documentation is the A. Client's year-end. B. Documentation completion date. C. Last date of significant fieldwork. D. All of these are incorrect in that no information may ever be deleted from audit documentation.
B
The internal control flowchart is an example of: A. A supporting schedule. B. An administrative working paper. C. A lead schedule. D. A corroborative working paper.
B
What ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion? A. The audit time budget. B. The auditors' judgment. C. Generally accepted accounting quality standards. D. The auditors' working papers.
B
Which of the following best describes the reason that auditors are concerned with the detection of related party transactions? A. The financial statements must often be adjusted for the effects of material related party transactions. B. Material related party transactions must be disclosed in the notes to the financial statements. C. The substance of related party transactions will differ from their form. D. In a related party transaction one party has the ability to exercise significant influence over the other party.
B
Which of the following groups are not considered a specialist by AICPA Professional Standards? A. Appraisers. B. Internal auditors. C. Engineers. D. Geologists.
B
Which of the following is most consistent with an increase in the ratio of debt to equity? A. Payment of a required principal payment on long-term debt. B. Repurchase of a portion of the company's outstanding common stock. C. Higher than expected profits due to a decrease in cost of goods sold. D. Payment of most accounts receivable immediately prior to year-end using a portion of the company's cash.
B
Which of the following is most likely to be considered an analytical procedure? A. Testing purchases at year-end to determine they were recorded in the proper period. B. Comparing inventory balances to recent sales activities. C. Selecting a sample of year-end receivables for confirmation. D. Reconciling physical counts of inventory to perpetual records.
B
Which of the following is not a function of working papers? A. Provide support for the auditors' report. B. Provide support for the accounting records. C. Aid partners in planning and conducting future audits. D. Document staff compliance with generally accepted auditing standards.
B
Which of the following is not an assertion relating to classes of transactions? A. Accuracy B. Adequacy C. Cutoff D. Classification
B
Which of the following statements is not correct regarding the auditor's further analysis? A. The Mid-Central Region has fewer average full-time equivalent employees per store than the other regions per store. B. The other regions all generate higher sales per square foot than the Mid-Central Region. C. The Mid-Central Region has the highest average wages per full-time equivalent employee. D. The largest contributor to total corporate profits is the Southwest Region.
B
An auditor is performing an analytical procedure that involves comparing a client's ratios with other companies in the same industry. This technique is referred to as: A. Vertical analysis. B. Horizontal analysis. C. Cross-sectional analysis. D. Comparison analysis.
C
An auditor performs analytical procedures that involve comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on the above information, the most likely cause of the increase in gross margin would be: A. An increase in the number of competitors selling similar products. B. A decrease in the number of suppliers of the material used in manufacturing the product. C. An overstatement of year-end inventory. D. An understatement of year-end accounts receivable.
C
Analytical procedures are required at the risk assessment stage and as: A. Tests of internal control. B. Substantive procedures. C. Procedures near the end of the audit. D. Computer generated procedures.
C
Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as: A. Appropriate assertions. B. Sufficient assertions. C. Relevant assertions. D. Reliable assertions.
C
Assertions with high inherent risk are least likely to involve: A. Complex calculations. B. Difficult accounting issues. C. Routine transactions. D. Significant judgment by management.
C
Audit documentation is intended to allow ___________ to understand the audit work performed, the evidence obtained, and the significant conclusions. A. a certified public accountant B. the general public C. an experienced auditor D. the controller at the company being audited
C
Auditors must obtain written client representations that typically should be signed by: A. The president and the chairperson of the board. B. The treasurer and the internal auditor. C. The chief executive officer and the chief financial officer. D. The corporate counsel and the audit committee chairperson.
C
During an audit, the working papers are primarily considered to be: A. A client-owned record of conclusions reached by the auditors who performed the engagement. B. Evidence supporting financial statements. C. Support for the auditors' representations as to compliance with generally accepted auditing standards. D. A record to be used as a basis for the following year's engagement.
C
Fraudulent sales and accounts receivables recorded at year-end (with no cost of goods sold entry) will: A. Decrease recorded net income. B. Decrease the current ratio. C. Increase days of sales in accounts receivable. D. Increase year-end recorded inventory.
C
Further audit procedures include: A. Risk assessment procedures and Test of controls B. Risk assessment procedures C. Tests of controls D. neither
C
Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. The lower number of stores in the Mid-Central Region. II. Sales employees are not as productive in generating sales as those in other regions. III. The Mid-Central Region has a lower gross margin. A. I only. B. II only. C. II and III only. D. I, II and III.
C
To be effective, analytical procedures performed near the end of the audit should be performed by A. The partner performing the quality review of the audit. B. A beginning staff accountant who has had no other work related to the engagement. C. A manager or partner who has a comprehensive knowledge of the client's business and industry. D. The CPA firm's quality control manager.
C
Which of the following approaches to an audit is most likely to result in a detailed analysis of one or more characteristics of an entire population? A. A horizontal analysis approach. B. A test design approach. C. A data analytical approach. D. A ratio analysis approach.
C
Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation. B. Observation. C. Reviewing subsequent events or transactions. D. Analyzing corporate organizational structure.
C
Which of the following is least likely to be included in a client's representation letter? A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements. B. The company has complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance. C. Management acknowledges responsibility for illegal actions committed by employees. D. Management has made available all financial statements, including notes.
C
Which of the following is not a primary purpose of audit working papers? A. To coordinate the examination. B. To assist in preparation of the audit report. C. To decrease the need for substantive procedures. D. To provide evidence of the audit work performed.
C
Applying substantive tests to the details of asset and liability accounts as of an interim date, rather than as of the balance sheet date: A. Eliminates the use of certain statistical sampling methods that would otherwise be available. B. Presumes that the auditor will reperform the tests as of the balance sheet date. C. Should be especially considered when there are rapidly changing economic conditions. D. Potentially increases the risk that errors which exist at the balance sheet date will not be detected.
D
Even though the quantity, type, and content of working papers will vary, the working papers generally would include: A. Copies of those client records examined by the auditor during the course of the engagement. B. An evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit. C. Auditor's comments concerning the efficiency and competence of client management personnel. D. Auditing procedures followed and the testing performed in obtaining audit evidence.
D
Management has centralized purchasing and uses a model based upon previous year's sales with adjustments for trends in the market place (e.g., the trend to more casual shoes). A staff auditor has suggested that the centralized purchasing may be one of the reasons for the lower level of profitability in the Mid-Central Region. Which of the following would be the best single audit procedure to address the staff auditor's assertion? A. Take a sample of receiving documents at stores and trace to purchase orders to determine the length of time between the purchase and delivery of the goods. B. Interview store managers in the Mid-Central Region to determine their attitude toward centralized purchasing. C. Perform an inventory count at selected stores in the Mid-Central Region and determine if adjustments are needed to the perpetual records. D. Perform a product-line analysis of sales and purchases in the Mid-Central Region and compare with other regions.
D
Which of the following is not generally considered a difficulty in using data analytical approaches in auditing and other areas? A. Determining data likely to be useful. B. Limitations in data accuracy, completeness and quality. C. Combining disparate databases with one another. D. The requirement for networks of linked "super-computers" to perform any such calculations.
D
Which of the following is the most accurate statement regarding audit evidence? A. Audit evidence gathered by an auditor from outside an enterprise is reliable. B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. C. Oral representations made by management are not valid evidence. D. The auditor must obtain sufficient appropriate audit evidence.
D
Which of the following is true about analytical procedures? A. Performing analytical procedures results in the most reliable form of evidence. B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control. C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances. D. Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements.
D
An analytical procedure example is the comparison of: A. Financial ratios of the current year to previous years. B. Recorded amounts of major disbursements with appropriate invoices. C. Results of a statistical sample with the expected characteristics of the actual population. D. EDP generated data with similar data generated by a manual accounting system.
A
A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so: A. Violates professional standards. B. Is acceptable, but should only be done when cost justified. C. Is acceptable, but only for non-public clients. D. Is acceptable and desirable under all conditions.
A
A schedule listing account balances for the current and previous years, and columns for adjusting and reclassifying entries proposed by the auditors to arrive at the final mount that will appear in the financial statement, is referred to as a: A. Working trial balance. B. Lead schedule. C. Summarizing schedule. D. Supporting schedule.
A
The permanent file section of the working papers that is retained 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 client's legal counsel concerning pending litigation. D. Narrative descriptions of the client's accounting procedures and controls.
D
Which of the following is not a basic procedure used in an audit? A. Risk assessment procedures. B. Substantive procedures. C. Tests of controls. D. Tests of direct evidence.
D
Which of the following is not a financial statement assertion relating to account balances? A. Completeness. B. Existence. C. Rights and obligations. D. Recorded value and discounts.
D
Which of the following is not accurate as it applies to using data analytics in financial statement auditing: A. It is often used with audit software such as ACL and IDEA. B. It may be used in the risk assessment stage of the audit. C. It may consider nonfinancial information. D. It ordinarily requires that all audit staff members maintain a high level of data analytics skills.
D