Chapter 5
__________ procedures allow auditors to use plausible relationships among FS data to gather audit evidence.
Analytical
What type of audit procedure? Compare current financial information with comparable prior periods.
Analytical procedures
Current or permanent file? An adjusted trial balance.
Current
Current or permanent file? An analysis of miscellaneous expenses.
Current
T or F: The recording of a fraudulent credit sale at well above the item's cost on the last day of the year will increase the current ratio.
True
To audit fair value estimates, auditors can use all of the following approaches except: a. confirm management's estimate b. independently develop an estimate to compare to management c. test management's process d. hire a valuation specialist
A
Which of the following is not a factor that affects the independent auditors' judgment as to the quantity, type, and content of working papers? a. The nature of the audit report. b. The timing and the number of personnel to be assigned to the engagement. c. The need for supervision of the engagement. d. The nature of the financial statements, schedules, or other information upon which the auditors are reporting.
B
Which of the following involves comparisons with similar firms at a given point in time? a. horizontal analysis b. cross-sectional analysis c. vertical analysis d. regression analysis
B
The permanent file of the auditors' working papers generally should include: a. names and addresses of all audit staff personnel on the engagement. b. time and expense reports. c. a copy of key customer confirmations. d. a copy of the corporate charter.
D
Which of the following is not a financial statement assertion made by management? a) Existence of recorded assets and liabilities b) Completeness of recorded assets and liabilities c) Valuation of assets and liabilities d) Effectiveness of internal control
D
T or F: A client representation letter helps to remind the client officers of their primary and personal responsibility for the financial statements.
True
T or F: A company's financial statements are the representations and assertions of the company's management.
True
The type of audit procedures performed by auditors to obtain audit evidence include: (Select all that apply) a. tests of controls b. substantive procedures c. risk assessment procedures d. FS reconciliations
A, B, C
Common methods for auditors to determine related parties include: (Select all that apply) a. reviewing SEC filings b. inquiries of management c. contacting client customers and vendors d. conflict-of-interest statements
A, B, D
The audit risk model is a function of: (Select all that apply) a. Detection risk b. FS risk c. Control risk d. Inherent risk
A, C, D
What type of audit procedure? Calculate the ratios of bad debt expense to credit sales.
Analytical Procedures
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Variety of records in support of the company's business and accounting information system
B
Analytical procedures are: a. diagnostic tests of financial information that may not be classified as audit evidence. b. statistical tests of financial information designed to identify areas requiring intensive investigation. c. tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. d. analytical tests of financial information made by a computer.
C
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Written documentation and representation from clients
G
Incorrect or Correct? Rather than restrict detection risk through the performance of more substantive procedures, auditors assess it.
Incorrect
Incorrect or Correct? Audit risk refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially or immaterially misstated.
Incorrect - "immaterially" not included
Which assertion? Accounts are described and classified in accordance with GAAP and FS notes are complete, appropriate, and clearly expressed.
Presentation and Disclosure
In regards to audit evidence, __________ is a measure of the quantity of audit evidence that should be obtained.
Sufficiency
What is not an assertion relating to classes of transactions?
Sufficiency
T or F: Some high-risk auditing situations would include clients with weak internal control, unsound financial condition, or unreliable management.
True
T or F: Strong internal control will increase the reliability of certain types of evidence and reduce the overall quantity of substantive procedures performed by the auditors.
True
T or F: The information contained in the auditors' working papers constitutes the principal evidence of the auditors' work and their resulting conclusions.
True
To identify the specific audit steps performed, auditors use these symbols when preparing the working paper. a. PBC b. Cross-reference c. Index d. Tick mark
D
What group is not considered a specialist by AICPA professional standards?
Internal auditors
Current or Permanent File? Copy of company's articles of incorporation
Permanent
Which assertion? The company legally owns the assets.
Rights and Obligations
What type of audit procedure? Determine whether disbursements are properly approved.
Test of Controls
An auditor compared current year GM% with prior year GM%. What kind of audit test is this?
Analytical procedure
Management makes FS assertions related to: (Select all that apply) a. presentation and disclosure b. classes of transactions and events c. account balances d. fairness of the audit opinion
A, B, C
Sufficiency is the quantity and __________ is the quality of audit evidence needed.
Appropriateness
Representation letters are dated as of the date of the ________.
Audit report
Which of the following is required documentation in an audit? a. Flowchart b. Written audit program c. Memo setting forth scope of audit
B - MUST be in work papers
Rank the inherent risk resulting from the different type of transactions from highest to lowest. a. Routine b. Non-routine c. Estimation
C, B, A
To be effective, analytical procedures performed at the end of an audit should be performed by?
Manager/partner who has comprehensive knowledge of client's industry
T or F: A confirmation reply from an account receivable account ordinarily would be considered more reliable evidence than an account receivable clerk's reply to an inquiry from the auditor.
True
T or F: A copy of a long-term lease agreement should be filed in the permanent file.
True
Differences of opinion between members of the audit staff about auditing matters should: a. be documented along with the manner in which they were resolved. b. be included in a note to the financial statements. c. never be documented in the working papers because to do could lead to legal liability problems. d. be described in the auditors' report.
A
Which of the following is not a management assertion? a. Existence. b. Verification. c. Rights. d. Valuation.
B
Incorrect or Correct? Inherent risk is the possibility of material misstatement before considering the client's internal control.
Correct
Inventory can be observed as it is ______ by client personnel.
Counted
Current or Permanent File? Bank reconciliation
Current
Current or Permanent File? Lead sheet for cash
Current
Current or Permanent File? Working trial balance
Current
Current or permanent file? A confirmation of financial institution deposits.
Current
Audit documentation, which is the record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach are also known as: a. confirmation b. workpapers c. representation letter d. substantive procedures
B
Which of the following statements best describes why auditors investigate related party transactions? a) Related party transactions generally are illegal acts b) The substance of related party transactions may differ from their form c) All related party transactions must be eliminated as a step in preparing consolidated financial statements d) Related party transactions are a form of management fraud
B
Which type of risk does an auditor have control over through substantive auditing procedures? A) Control Risk. B) Detection Risk. C) Sufficiency Risk. D) Inherent Risk.
B
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. Vouching
B
What is not an analytical procedure?
Comparison of FS amounts with source documents (detailed test)
Which of the following business characteristics is not indicative of high inherent risk? a) Operating results that are highly sensitive to economic factors b) Large likely misstatements detected in prior audits c) Substantial turnover of management d) A large amount of assets
D
T or F: Auditors own the working papers, but they must turn any of them over to the client if the client requests them.
False
T or F: No audit working papers may be discarded after the date of the audit report.
False
T or F: Related party transactions have in common that they all result from dealings between parties related due to ownership interests.
False
T or F: Valuation of equipment carried at $70,000 could best be established by physically inspecting the equipment.
False
T or F: Working papers should be kept for no more than three years because of the cost of storage.
False - Public: 7; Nonpublic: 5
Incorrect or Correct? Less control risk means an increase in the risk of material misstatement.
Incorrect - decrease in risk of material misstatement
Analytical procedures are the primary way to test data _______.
Interrelationships
The primary source of evidence about pending litigation is the attorney ______.
Letter
Is the comparison of FS amounts with source documents (detailed test) an analytical procedure?
No
Current or permanent file? A pension agreement.
Permanent
Current or permanent file? Articles of incorporation.
Permanent
______ may be involved in some testing of calculations.
Specialists
What type of audit procedure? Confirm accounts receivable.
Test of details of account balances, transactions, or disclosures
A __________ model, such as a discounted future cash flow model, can be used to determine fair value for assets that do not have active markets.
Valuation
Which assertion? Assets are recorded at proper amounts.
Valuation
Which assertion? All transactions, assets, liabilities, and equity interests are included in FS at proper amounts.
Valuation, Allocation, and Accuracy
Which assertion? Assets are properly classified.
Presentation and Disclosure
As part of their audit, auditors obtain a representation letter from their client. Which of the following is not a valid purpose of such a letter? a) To increase the efficiency of the audit by eliminating the need for other audit procedures b) To remind the client's management of its primary responsibility for the financial statements c) To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement d) To provide evidence in those areas dependent upon management's future intentions
A
Performing analytical procedures may help an auditor to: a. Achieve audit objectives related to a particular assertion. b. Develop an effective system of quality control. c. Meet PCAOB requirements that analytical procedures be performed relating to every major account. d. Increase the level of detection risk.
A
More effective audit procedures are performed by auditors at: a. interim b. beginning of the year c. year-end
C
Which of the following procedures is not customarily used by the auditors in determining the existence of related parties? a. Inquire of customers, suppliers, and employees as to their knowledge of related-party transactions. b. Inquire of appropriate management personnel as to the names of all related parties and whether there were any transactions with these parties during the period. c. Evaluate the company's procedures for identifying and properly accounting for related-party transactions. d. Review prior years' work papers for the names of known related parties.
A
The __________ typically includes the working papers for a particular engagement.
Audit file
A principal purpose of a representation letter from management is to: a. substitute for other evidence-gathering audit procedures. b. remind management of its primary responsibility for the financial statements. c. serve as an introduction to company personnel and authorize the auditors to examine the records. d. confirm management's approval of the work performed by the auditors.
B
Analytical procedures are most likely to detect: a) Weaknesses of a material nature in internal control b) Unusual transactions c) Noncompliance with prescribed control activities d) Improper separation of accounting and other financial duties
B
Audit documentation should identify all of the following except: a. dates audit work was performed b. dates client transactions and entries were made c. auditors who performed the work d. auditors who reviewed the work
B
In using the work of a specialist, the auditors referred to the specialist's findings in their report. This would be an appropriate reporting practice if the: a) Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist b) Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements c) Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements d) Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist
B
In what section of the audit working papers would a long-term lease agreement by filed? a) Current working paper file b) Permanent working paper file c) Lead schedule file d) Corroborating documents file
B
The most sophisticated expectation development technique that allows auditors to measure the reliability and precisions of the expectation is: a. trend b. regression analysis c. reasonableness test d. horizontal
B
The representation letter should be dated the same as the: a. date of lawyer's letter b. date of auditor's report c. first day of the audit d. engagement letter
B
Factors that can influence the level of audit documentation detail include: (Select all that apply) a. size of audit client b. extent of judgment involved c. risk of misstatement d. nature of auditing procedures
B, C, D
All of the following are acceptable methods to evaluate the reasonableness of accounting estimates except: a. independently develop an estimate to compare to management's estimate b. review subsequent events bearing on the estimate c. confirm the estimate with a third party d. review and test management's process of developing estimates
C
Analytical procedures performed near the end of the audit to assist the auditor informing an overall conclusion on the financial statements are aimed primarily at: a. Gathering evidence concerning account balances that have not changed from the prior year. b. Retesting internal control procedures. c. Considering unusual or unexpected account balances that were not previously identified. d. Performing a test of transactions to corroborate management's financial statement assertions.
C
Audit procedures performed to obtain an understanding of the client and its environment, including its internal control, and to assess the risk of material misstatement are referred to as: a. analytical procedures. b. substantive procedures. c. tests of controls. d. tests of details of balances.
C
Auditors are required to complete the audit file and finalize audit documentation 60 days after the report release date which is known as the: a. fieldwork date b. audit report date c. documentation completion date d. documentation execution date
C
Confirmations are generally effective at providing evidence for this assertion. a. Valuation b. Completeness c. Existence
C
Evidence is generally considered sufficient when: a. it has been obtained by random selection. b. it is reliable. c. there is enough of it to afford a reasonable basis for an opinion on the financial statements. d. it has the qualities of being relevant, objective, and free from bias.
C
For the audit risk model, auditors must restrict this risk through the performance of substantive procedures. a. Control b. Inherent c. Detection
C
In developing an expectation for analytical procedures, the auditors are least likely to consider: a. Financial information for comparable prior periods. b. Relationships between financial information and relevant non-financial data. c. Anticipated costs of audit completion. d. Relationships among elements of financial information within a period.
C
Of the following, which is the least reliable type of audit evidence? a) Confirmations mailed by outsiders to the auditors b) Correspondence between the auditors and suppliers c) Copies of sales invoices inspected by the auditors d) Canceled checks returned in the year-end bank statement directly to the client
C
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? a. Trend analysis b. A detailed test of balance analysis c. Ratio analysis d. Risk analysis
C
Which assertion? All assets have been recorded.
Completeness
Which assertion? All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded.
Completeness
Incorrect or Correct? Absent any other changes, an increase in the risk of material misstatement results in an increase in audit risk.
Correct
Incorrect or Correct? Both inherent risk and control risk exist independently of the audit of financial statements.
Correct
Incorrect or Correct? Detection risk does not exist when no audit is performed.
Correct
Current or permanent file? Adjusting journal entries.
Current
Which assertion? Transactions and events have been recorded in the correct accounting period.
Cutoff
Which assertion? Transactions are recorded in the correct accounting period.
Cutoff
A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: a) Remain silent on the matter since it is an internal matter of the auditing firm b) Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion c) Document the additional work required, since all disagreements of this type will require expanded substantive procedures d) Document the assistant auditor's position and how the difference of opinion was resolved
D
T or F: Working papers should never be prepared by the client's personnel.
False
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Tangible asset from examination
D
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. Tracing
D
Rank the pieces of documentary evidence from most reliable to least reliable. a. Vendor's invoice b. Client copy of sales invoice c. Paid check d. Cutoff bank statement
D, A, C, B
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Computations made independently to prove arithmetical accuracy of client records
E
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. External confirmation
E
Which assertion? Assets, liabilities, and equity interests exist and recorded transactions and events have occurred.
Existence and Occurrence
Which assertion? There is such an asset.
Existence and Occurrence
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Comparison between the relationships among financial or nonfinancial data
F
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. Inspection of tangible assets
F
T or F: Analytical procedures are only useful near completion of the audit as a final overview of the audited figures.
False
T or F: As a general rule, evidence about the existence of assets is considered most reliable when it is provided by the employee or department with custody of the related assets.
False
T or F: Audit working papers generally provide evidence of compliance with planning and risk assessment requirements of an audit, but not of performing further audit procedures.
False
T or F: Audit working papers should provide primary support from the client's financial statements.
False
T or F: Because CPA firms need an adequate return on their time and investment, cost tends to be the primary factor influencing the auditors in deciding what evidence should be obtained.
False
T or F: If strong internal control exists in a client company, then evidence obtained internally is much stronger than evidence obtained from sources outside the client company.
False
T or F: Income statement accounts should not be included on the working trial balance if the accounts have been closed to retained earnings.
False
T or F: Oral evidence is sufficient by itself if it comes from a top corporate officer.
False
T or F: Reclassification entries are used to correct for the effects of errors or fraud discovered in the client' s financial statements and accounting records.
False
T or F: The risk of misstatement is the same from one engagement to the next.
False
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. Recalculation
G
Incorrect or Correct? The risk of material misstatement is composed of the three components of audit risk.
Incorrect - inherent and control (2)
Current or Permanent File? Known related parties
Permanent
Current or Permanent File? Patent agreement
Permanent
Current or permanent file? A chart of accounts.
Permanent
Current or permanent file? A lease agreement.
Permanent
Current or permanent file? An analysis of long-term debt.
Permanent
Current or permanent file? An analysis of owners' equity accounts.
Permanent
The backbone of the working papers is the __________, which is the key schedule that controls and summarizes all supporting papers. a. working trial balance b. audit administrative working papers c. lead schedules d. adjusting journal entries
A
The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: a. Low b. High c. Identical d. Indeterminate
A
Tracing a sample of documents from the source documents to the ledgers is designed to test the financial statement assertion of: a. completeness. b. validity. c. existence. d. valuation.
A
Which of the following is not a function of audit working papers? a) Assist management in illustrating that the financial statements are in accordance with GAAP b) Assist audit team members responsible for supervision in reviewing the work c) Assist auditors in planning future engagements d) Assist peer reviewers and inspectors in performing their roles
A
Which type of risk does the management of a company have the most control over in the short term? A) Control Risk. B) Detection Risk. C) Sufficiency Risk. D) Inherent Risk.
A
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Methods and records to process, summarize, and report the company's transactions
A
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. Reperformance
A
Match the type of transaction with its example. a. Routine b. Non-routine c. Estimation 1. Calculating depreciation expense 2. Sales transactions 3. Determining allowance for uncollectible accounts
A - 2 B - 1 C - 3
Match the accounting estimate reasonableness test with its example. a. Review and test management's process of developing the estimate b. Independently develop an estimate to compare to management's c. Review subsequent events bearing on the estimate 1. Review warranty claims in the subsequent year to determine if estimate of warranty liabilities is appropriate at year end 2. Review past warranty claims to develop a percentage to apply to current sales to estimate warranty liabilities and compare to estimate developed by management 3. Review management support for the percentage applied to sales to estimate warranty liabilities
A - 3 B - 2 C - 1
Auditors should investigate any significant differences between their prior expectations and the actual amounts on the client's FS. Which of the following are proper methods of investigation in this case? (Select all that apply) a. Inquiry of management b. Reconsidering factors/methods originally used in making expectations c. Expanding tests of FS to determine materiality d. Inquiry of employees who entered transactions
A, B, C
Which of the following activities would an auditor consider hiring a specialist for assistance? (Select all that apply) a. Estimation of oil and gas reserves b. Testing materiality of certain adjusting entries c. Testing internal controls of manufacturing company d. Examining company's tax return for prior year e. Determining value of a diamond shop's inventory f. Determining value of various art pieces held by company
A, E, F
Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items? a. Account analyses. b. Lead schedules. c. Supporting schedules. e. Control accounts.
B
Working papers need to be safeguarded because they contain: a. CPA firm confidential information b. confidential client information c. auditor fee information
B
When an audit is made in accordance with generally accepted auditing standards, the independent auditors must: a. observe the taking of physical inventory on the balance sheet date. b. use statistical sampling. c. perform analytical procedures. d. perform tests of controls.
C
Which of the following is not a component of audit risk? A) Control Risk. B) Detection Risk. C) Sufficiency Risk. D) Inherent Risk.
C
Which of the following is not a primary approach to auditing an accounting estimate? a) Review and test management's process for developing the estimate b) Review subsequent transactions c) Confirm the amounts d) Develop an independent estimate
C
a. Accounting Information Systems b. Documentary Evidence c. Third Party Representations d. Physical Evidence e. Computations f. Data Interrelationships g. Client Representations Representations or evidence from outside parties
C
a. An independent execution of procedures or controls that were originally performed by the client. b. Establishing the validity of a transaction by examining supporting documents. c. Examining a document or record. d. Following a transaction from a source document to recorded entries. e. Obtaining a written response about a particular item from a third party. f. Physically examining an asset. g. Testing the mathematical accuracy of documents or records. Inspection of records
C
A primary purpose of the audit working papers is to: a) Aid the auditors by providing a list of required procedures b) Provide a point of reference for future audit engagements c) Support the underlying concepts included in the preparation of the basic financial statements d) Support the auditors' opinion
D
Although there are sometimes exceptions, ordinarily the most reliable audit evidence is: a. generated internally through a system of effective controls rather than through a computerized system of controls. b. from nonindependent sources within the client company rather than independent sources outside the client company. c. a facsimile of original documents, rather than photocopy. d. documentary in form rather than an oral representation.
D
Audit risk is the risk that FS will contain a material departure from GAAP and the auditor will issue: a. disclaimer opinion b. adverse opinion c. modified opinion d. unmodified opinion
D
Audit working papers should include: a. a number of permanent files each year and a general file that summarizes the permanent files. b. all authorization details for overtime worked. c. details on client ownership of individual working papers. d. content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards.
D
Calculating days sales in ending accounts receivable and comparing it to the prior year would be an example of: a. inspection b. recalculation c. re-performance d. analytical procedure
D
The auditors' working papers will generally be least likely to include documentation showing how the: a. client's internal control structure had been considered. b. unusual matters were resolved. c. engagement had been planned. d. client's schedules were prepared.
D
The major reason auditors gather evidence is to: a. evaluate management. b. detect fraud. c. assess control risk. d. form an opinion on the financial statements.
D
At the conclusion of the audit, the CPAs obtain a written __________ from client officers that includes several specific items, such as the fact that all known liabilities are reflected in the FS.
Representation letter
Which assertion? Company holds rights to assets, and liabilities are the obligations of the company.
Rights and Obligations
What type of audit procedure? Prepare a flowchart of internal control over sales.
Risk Assessment Procedures (other than analytical)
T or F: Audit evidence may be defined as any information that corroborates or refutes the auditor's premise that the financial statements present fairly the client's financial position and operating results.
True
