Chapter 5 MC

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. True False

T

A company's financial statements are the representations and assertions of the company's management. True False

T

A copy of a long-term lease agreement should be filed in the permanent file. True False

Support the auditors' opinion.

A primary purpose of the audit working papers is to: Aid the auditors by providing a list of required procedures. Provide a point of reference for future audit engagements. Support the underlying concepts included in the preparation of the basic financial statements. Support the auditors' opinion.

Permanent working paper file.

In what section of the audit working papers would a long-term lease agreement be filed? Current working paper file. Permanent working paper file. Lead schedule file. Corroborating documents file.

F

Income statement accounts should not be included on the working trial balance if the accounts have been closed to retained earnings. True False

Unusual transactions.

Analytical procedures are most likely to detect: Weaknesses of a material nature in internal control. Unusual transactions. Noncompliance with prescribed control activities. Improper separation of accounting and other financial duties.

F

Analytical procedures are only useful near completion of the audit as a final overview of the audited figures. True False

tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data

Analytical procedures are: statistical tests of financial information designed to identify areas requiring intensive investigation. tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. analytical tests of financial information made by a computer. diagnostic tests of financial information that may not be classified as audit evidence.

Considering unusual or unexpected account balances that were not previously identified.

Analytical procedures performed near the end of the audit to assist the auditor in forming an overall conclusion on the financial statements are aimed primarily at: Gathering evidence concerning account balances that have not changed from the prior year. Retesting internal control procedures. Considering unusual or unexpected account balances that were not previously identified. Performing a test of transactions to corroborate management's financial statement assertions.

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. True False

To increase the efficiency of the audit by eliminating the need for other audit procedures.

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? To increase the efficiency of the audit by eliminating the need for other audit procedures. To remind the client's management of its primary responsibility for the financial statements. To document in the audit working papers the client's responses to certain verbal inquiries made by the auditors during the engagement. To provide evidence in those areas dependent upon management's future intentions.

T

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.

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. True False

F

Audit working papers should provide primary support from the client's financial statements. True False

F

Auditors own the working papers, but they must turn any of them over to the client if the client requests them. True False

remind management of its primary responsibility for the financial statements.

A principal purpose of a representation letter from management is to: remind management of its primary responsibility for the financial statements. substitute for other evidence-gathering audit procedures. confirm management's approval of the work performed by the auditors. serve as an introduction to company personnel and authorize the auditors to examine the records.

Ratio analysis.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? Trend analysis. A detailed test of balance analysis. Ratio analysis. Risk analysis.

Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles

Which of the following is not a function of audit working papers? Assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. Assist audit team members responsible for supervision in reviewing the work. Assist auditors in planning future engagements. Assist peer reviewers and inspectors in performing their roles.

F

No audit working papers may be discarded after the date of the audit report. True False

Copies of sales invoices inspected by the auditors.

Of the following, which is the least reliable type of audit evidence? Confirmations mailed by outsiders to the auditors. Correspondence between the auditors and suppliers. Copies of sales invoices inspected by the auditors. Canceled checks returned in the year-end bank statement directly to the client.

F

Oral evidence is sufficient by itself if it comes from a top corporate officer. True False

Achieve audit objectives related to a particular assertion.

Performing analytical procedures may help an auditor to: Achieve audit objectives related to a particular assertion. Develop an effective system of quality control. Meet PCAOB requirements that analytical procedures be performed relating to every major account. Increase the level of detection risk.

F

Reclassification entries are used to correct for the effects of errors or fraud discovered in the client' s financial statements and accounting records. True False

F

Related party transactions have in common that they all result from dealings between parties related due to ownership interests. True False

T

Some high-risk auditing situations would include clients with weak internal control, unsound financial condition, or unreliable management. True False

Low.

The cost of analytical procedures in terms of time needed to perform, when compared to other tests, is ordinarily considered: Low. High. Identical. Indeterminate.

T

The information contained in the auditors' working papers constitutes the principal evidence of the auditors' work and their resulting conclusions. True False

form an opinion on the financial statements.

The major reason auditors gather evidence is to: detect fraud. form an opinion on the financial statements. assess control risk. evaluate management.

T

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 False

F

The risk of misstatement is the same from one engagement to the next. True False

F

Valuation of equipment carried at $70,000 could best be established by physically inspecting the equipment. True False

perform analytical procedures.

When an audit is made in accordance with generally accepted auditing standards, the independent auditors must: perform analytical procedures. observe the taking of physical inventory on the balance sheet date. use statistical sampling. perform tests of controls.

A large amount of assets.

Which of the following business characteristics is not indicative of high inherent risk? Operating results that are highly sensitive to economic factors. Large likely misstatements detected in prior audits. Substantial turnover of management. A large amount of assets.

Effectiveness of internal control.

Which of the following is not a financial statement assertion made by management? Existence of recorded assets and liabilities. Completeness of recorded assets and liabilities. Valuation of assets and liabilities. Effectiveness of internal control.

Verification.

Which of the following is not a management assertion? Existence. Rights. Verification. Valuation.

Confirm the amounts

Which of the following is not a primary approach to auditing an accounting estimate? Review and test management's process for developing the estimate. Review subsequent transactions. Confirm the amounts. Develop an independent estimate.

The substance of related party transactions may differ from their form.

Which of the following statements best describes why auditors investigate related party transactions? Related party transactions generally are illegal acts. The substance of related party transactions may differ from their form. All related party transactions must be eliminated as a step in preparing consolidated financial statements. Related party transactions are a form of management fraud.

F

Working papers should be kept for no more than three years because of the cost of storage. True False

F

Working papers should never be prepared by the client's personnel. True False

T

A client representation letter helps to remind the client officers of their primary and personal responsibility for the financial statements. True False

T

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 False

Document the assistant auditor's position and how the difference of opinion was resolve

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: Remain silent on the matter since it is an internal matter of the auditing firm. Note that the assistant auditor is completely dissociated from responsibility for the auditors' opinion. Document the additional work required, since all disagreements of this type will require expanded substantive procedures. Document the assistant auditor's position and how the difference of opinion was resolved.

documentary in form rather than an oral representation.

Although there are sometimes exceptions, ordinarily the most reliable audit evidence is: a facsimile of original documents, rather than photocopy. documentary in form rather than an oral representation. generated internally through a system of effective controls rather than through a computerized system of controls. from nonindependent sources within the client company rather than independent sources outside the client company.

tests of controls.

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: rev: 02_24_2017_QC_CS-78661 analytical procedures. tests of details of balances. substantive procedures. tests of controls.

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. True False

there is enough of it to afford a reasonable basis for an opinion on the financial statement

Evidence is generally considered sufficient when: it is reliable. it has the qualities of being relevant, objective, and free from bias. it has been obtained by random selection. there is enough of it to afford a reasonable basis for an opinion on the financial statements.

Anticipated costs of audit completion.

In developing an expectation for analytical procedures, the auditors are least likely to consider: Financial information for comparable prior periods. Relationships between financial information and relevant nonfinancial data. Anticipated costs of audit completion. Relationships among elements of financial information within a period.

Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements.

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: Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. Auditors, as a result of the specialist's findings, give a qualified opinion on the financial statements. Client understands the auditors' corroborative use of the specialist's findings in relation to the representations in the financial statements. Auditors, as a result of the specialist's findings, decide to indicate a division of responsibility with the specialist.

T

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 False