Final Auditing Exam

Which of the following procedures could the auditor perform to test the effectiveness of controls over asset impairment? Ch.12 a. Perform substantive analytical procedures. b. Send confirmations to the management specialist who performed work related to the impairment. c. Inquire of management as to its process for determining assessment impairment, and follow up as appropriate. d. Inspect the asset for potential impairment.

Inquire of management as to its process for determining assessment impairment, and follow up as appropriate.

A formal budgeting process tied to the acquisition of long‐lived assets is a management activity, but is not a control over long‐lived assets. (T/F) Ch.12

False

A substantive procedure appropriate for testing the existence of inventory would be to perform year‐end cutoff tests by noting the last shipping and receiving document numbers used before the physical inventory count is taken. (T/F) Ch.11

False

An auditor would typically not use trend analyses as a planning analytical procedure when auditing debt. (T/F) Ch.13

False

An engagement quality review is required for publicly traded companies, and is optional for privately held company audits. (T/F) Ch.14

False

An example of a Type I subsequent event would be when a significant lawsuit is initiated relating to an incident that occurred after the balance sheet date. (T/F) Ch.14

False

An organization typically has many debt transactions during the year, with each individual transaction being immaterial. (T/F) Ch.13

False

Assume a client setting where there are weak controls and client incentives to capitalize items that it should expense. In such a setting, the auditor likely obtains most of the audit evidence through tests of controls. (T/F) Ch.12

False

Auditors should not issue a going‐concern audit opinion if it would be a self‐fulfilling prophecy that the company will, indeed, go bankrupt. (T/F) Ch.14

False

Because a purchase order is an external document, its level of reliability is higher than that of a requisition, which is an internal document. (T/F) Ch.11

False

Because of conservatism considerations, auditors should require a client to overestimate its reserve for restructuring. (T/F) True

False

If the auditor is not testing controls related to equity, he or she does not need to have an understanding of controls over equity. (T/F) Ch.13

False

In terms of planning analytical procedures, assume that the client has introduced a new product with a low price point and significant customer demand. The auditor would expect inventory turnover to increase and days' sales in inventory to also increase. (T/F) Ch.11

False

Long‐lived assets are typically immaterial for most manufacturing organizations. (T/F) Ch.12

False

One important primary source of evidence concerning loss contingencies is the client's management; a primary source of corroborative evidence concerning contingencies is the client's legal counsel, which provides the management representation letter. (T/F) Ch.14

False

One of the common ways that managers have committed fraud in the acquisition and payment cycle involves inappropriately classifying assets (e.g., inventory) as expenses. (T/F) Ch.11

False

One of the issues that the auditor is required to communicate to the audit committee is the competence, training, and industry specialization of each of the highest‐ranking members of the engagement team (the partner, manager, and audit senior). (T/F) Ch.14

False

Recording the purchase of treasury stock is straightforward and therefore does not pose any inherent risk of material misstatement. (T/F) Ch.13

False

The auditor is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for loss contingencies; management is responsible for determining that the auditor has properly identified, accounted for, and disclosed material loss contingencies. (T/F) Ch.14

False

The existence and presentation/disclosure assertions are usually the most relevant for inventory. (T/F) Ch.11

False

The legal implications of a client's noncompliance with laws and regulations are ultimately a matter for the auditor to resolve before the auditor can issue the audit opinion. (T/F) Ch.14

False

The management letter confirms management responses obtained by the auditor earlier in the audit and the continuing appropriateness of those responses. (T/F) Ch.14

False

The terms engagement quality review and concurring partner review are synonymous. (T/F) Ch.14

False

When performing planning analytical procedures, the auditor should not typically expect the client to use depreciable lives similar to organizations in the same industry. (T/F) Ch.12

False

When responding to identified risks of material misstatement associated with equity, the auditor often decides to rely heavily on tests of controls. (T/F) Ch.13

False

When testing a control that requires training for all employees involved in equipment management, the auditor would typically reperform the control. (T/F) Ch.12

False

A fraud scheme that WorldCom top‐ management employed involved capitalizing items that should have been expensed. (T/F) Ch.12

True

A planning analytical procedure in the acquisition and payment cycle that might indicate fraud is that inventory is growing at a rate greater than sales. (T/F) Ch.11

True

A potential fraud risk associated with debt is the intentional misclassification of short‐term debt as long‐ term debt. (T/F) Ch.13

True

A reconciliation of debt and interest accounts to the general ledger is a control designed to mitigate the risks of material misstatement associated with debt. (T/F) Ch.13

True

A substantive procedure appropriate for testing rights and obligations associated with inventory would be to review vendor invoices when testing disbursements to determine that proper title is conveyed. (T/F) Ch.11

True

A well‐conceived inventory control system should provide reasonable assurance that all purchases are authorized and that inventory transactions are recorded accurately, completely, and in a timely manner. (T/F) Ch.11

True

An inherent risk associated with debt is that management might try to avoid complete and accurate disclosure of debt covenants and potential violations. (T/F) Ch.13

True

An inherent risk associated with intangible long‐lived assets is the difficulty in determining the cost of the asset. (T/F) Ch.12

True

Auditing standards recognize that there are inherent limitations in an auditor's ability to detect material misstatements relating to an organization's compliance with laws and regulations. (T/F) Ch.14

True

Auditors can test the client's warranty reserves using primarily tests of controls and substantive analytical procedures. (T/F) Ch.13

True

Auditors can use confirmations as a substantive procedure to obtain evidence on the completeness of debt. (T/F) Ch.13

True

Auditors should expect clients to have written policies for the acquisition and disposal of long‐lived assets. (T/F) Ch.12

True

Auditors who are aware of control deficiencies that could result in the material misstatement of lease accounts need to modify their substantive testing in response to those deficiencies. (T/F) Ch.12

True

Charging expenses directly to retained earnings rather than to the appropriate expense account is a potential fraud risk associated with equity. (T/F) Ch.13

True

Even if immaterial, an intentional misstatement may cause serious difficulties in the audit, and for the client. (T/F) Ch.14

True

Goodwill is the excess of the purchase price over the fair market value of the acquired organization's tangible assets, identifiable intangible assets, and liabilities. (T/F) Ch.12

True

If a client's long‐lived assets involve only a few assets of relatively high value, it might be most efficient to test long‐lived assets by using only substantive tests of details. (T/F) Ch.12

True

If there is a heightened risk of fraud related to the completeness of debt, the auditor may choose to search public records to identify debt obligations. (T/F) Ch.13

True

Known misstatements are those that the auditor has specifically identified and about which there is no doubt; they are also known as factual misstatements. (T/F) Ch.14

True

Management can provide disclosures on the face of the financial statements, or in the notes to the financial statements. (T/F) Ch.14

True

OAO Gazprom is a natural gas producer in Russia; top management used their power to siphon profits out of Gazprom and into their own pockets. In its filings, the company did not disclose many specific details about its related party transactions. (T/F) Ch.14

True

Objective criteria for evaluating the quality of the client's accounting policies is not available; assessing the quality, not just the acceptability of the significant accounting policies, is a matter of professional judgment. (T/F) Ch.14

True

One procedure that the auditor can use to test management's assertion that tangible long‐lived assets exist would be to inspect the tangible asset. (T/F) Ch.12

True

Patents are an example of long‐lived assets. (T/F) Ch.12

True

Review analytics should corroborate conclusions formed during the audit, thereby enabling the auditor to draw conclusions upon which to base the audit opinion. (T/F) Ch.14

True

Some common techniques that managers may use to fraudulently misstate financial statements related to long‐lived assets include overvaluing existing assets, recording fictitious assets, or capitalizing expenses. (T/F) Ch.12

True

The audit of inventory can be complex because inventory is easily transportable, exists at multiple locations, may become obsolete, and may be difficult to value. (T/F) Ch.11

True

The auditor needs to understand the client's business to perform meaningful planning analytical procedures. (T/F) Ch.12

True

The auditor's expectations when performing review analytical review can be less precise than those for substantive analytics. (T/F) Ch.14

True

The following are possible manipulations that may occur when employees perpetrate fraud during the purchase of inventory: under‐recording purchases, recording purchases in a later period, and not recording purchases. (T/F) Ch.11

True

The going‐concern evaluation is based on information obtained from typical audit procedures performed to test management's assertions; no separate procedures are required, unless the auditor believes that there is substantial doubt about the client's ability to continue as a going concern. (T/F) Ch.14

True

The management letter is not required, but auditors use it to make significant operational or control recommendations to the client. (T/F) Ch.14

True

The most common concerns for inventory are that purchases are understated or ending inventory is overstated, both of which will result in lower cost of goods sold and higher net income. (T/F) Ch.11

True

The pervasiveness of management estimates is a factor that heightens the inherent risk associated with long‐lived assets. (T/F) Ch.12

True

The primary planning analytical procedure for equity is a comparison of current‐year account balances with prior‐ year account balances, after considering the auditor's expectations based on knowledge of client activities. (T/F) Ch.13

True

Two important complexities in auditing inventory arise because inventory accounts experience a high volume of activity and are valued according to various inventory valuation methods. (T/F) Ch.11

True

Type I subsequent events provide evidence about conditions that existed at the balance sheet date, while Type II subsequent events provide evidence about conditions that did not exist at the balance sheet date, but that may require disclosure. (T/F) Ch.14

True

Typically, the most relevant assertion related to debt is completeness. (T/F) Ch.13

True

When auditing debt, the auditor will test controls for the audit opinion on internal controls, but choose not to test controls for the financial statement audit. (T/F) Ch.13

True

When auditing equity, the auditor will test controls for the audit opinion on internal controls, but choose not to test controls for the financial statement audit. (T/F) Ch.13

True

When auditing pension obligations, the auditor likely uses a specialist to assist the audit team. (T/F) Ch.13

True

When conducting the audit of acquisition and payment cycle accounts, the auditor will likely conduct less substantive tests for companies with effective internal controls than for companies with ineffective internal controls. (T/F) Ch.11

True

When considering the appropriate mix of evidence, the sufficiency and appropriateness of selected procedures vary across inventory assertions to achieve the desired level of assurance for each relevant assertion. (T/F) Ch.11

True

When selecting controls to test and performing tests of controls in the acquisition and payment cycle, the auditor might reasonably take a sample of receiving reports and trace them through the system to test controls related to the completeness assertion for inventory and accounts payable. (T/F) Ch.11

True

When testing debt, the auditor typically uses a substantive audit approach. (T/F) Ch.13

True

When testing potential impairment of assets, the auditor may need to rely on work performed by a specialist/expert. (T/F) Ch.12

True

In completing the audit, the auditor obtains a letter of audit inquiry. Which of the following is an accurate description of a letter of audit inquiry? Ch.14 a. A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which is received from the client's legal counsel. b. A letter that is the primary source of corroborative evidence concerning cash valuation, which is received from the client's bank. c. A letter that is the primary source of corroborative evidence concerning accounts receivable valuation, which is received from the client's customer. d. A letter that is the primary source of corroborative evidence concerning inventory valuation, which is received from the client's supplier.

a. A letter that is the primary source of corroborative evidence concerning litigation, claims, and assessments, which is received from the client's legal counsel.

Which of the following risks is an inherent risk related to asset impairment? Ch.12 a. Determination of asset impairment requires management judgment. b. It is difficult to identify the costs associated with the discovery of natural resources. c. Management might have incentives to not record all asset disposals. d. All of the above are inherent risks related to asset impairment.

a. Determination of asset impairment requires management judgement.

Which of the following is not a procedure that an engagement quality reviewer would perform? Ch.14 a. Evaluating whether or not to continue providing audit services to the client in the subsequent year, based on information gained during the current period audit. b. Discussing significant matters related to the financial statements and internal controls. c. Evaluating judgments about materiality and the disposition of corrected and uncorrected identified misstatements. d. Reviewing the engagement team's evaluation of the firm's independence in relation to the engagement.

a. Evaluating whether or not to continue providing audit services to the client in the subsequent year, based on information gained during the current period audit.

Which of the following statements is true? Ch.12 a. Existence and valuation assertions related to long‐lived assets are usually the most relevant assertions. b. A concern regarding the existence of long‐lived assets relates to whether management has properly recorded depreciation. c. Depletion expense is not an account that would be included when auditing long‐lived assets. d. All of the above statements are true.

a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions.

An auditor performing planning analytical procedures scans the repairs and maintenance expense accounts. Which of the following statements is likely to be consistent with the auditor's focus? Ch.12 a. Expenditures for long‐lived assets have not been charged to expense. b. Expenditures for long‐lived assets have been properly approved. c. Expenditures for long‐lived assets have been recorded in the correct period. d. The auditor would not be performing scanning as a planning analytical procedure.

a. Expenditures for ling-lived assets have not been charged to expense.

Which of the following accounts would not typically be included in the audit of debt? Ch.13 a. Interest income. b. Interest expense. c. Bonds payable. d. Notes payable.

a. Interest income.

Which of the following activities is not an activity associated with the acquisition and payment cycle? Ch.11 a. Receive a customer purchase order. b. Purchase of goods and services. c. Receipt of goods and services. d. Approval of items for payment.

a. Receive a customer purchase order.

Which of the following is not an inherent risk relating to inventory? Ch.11 a. Sales contracts may contain unusual terms, and revenue recognition is often complex. b. Inventory accounts typically experience a high volume of activity. c. Inventory accounts may be valued according to various accounting valuation methods. d. Identifying obsolete inventory and applying the lower of cost or market principle to determine valuation are difficult.

a. Sales contracts may contain unusual terms, and revenue recognition is often complex.

With regard to discussing significant audit adjustments with the audit committee, which of the following statements is false? Ch.14 a. Significant audit adjustments reflect a lack of independence between the auditor and client management. b. Significant audit adjustments may reflect on the stewardship and accountability of management. c. The audit committee should be made aware of significant audit adjustments, even if management readily agrees to make them. d. Significant adjustments, by definition, suggest that there have been internal control failures that must be communicated to the audit committee. e. Two of the above (a-d).

a. Significant audit adjustments reflect a lack of independence between the auditor and client management.

Which of the following evidence items would an auditor most likely not consider when evaluating the potential impairment of goodwill? Ch.12 a. The acquisition made by a competitor of an organization that is not a direct competitor of the client. b. The current market capitalization of the organization in comparison with its net book value. c. The cash flows and operating data of the reporting unit since acquisition compared with estimates made at the time of acquisition. d. The growth or decline in market share of the reporting unit since acquisition.

a. The acquisition made by a competitor of an organization that is not a direct competitor of the client.

Which of the following statements best describes the auditor's typical approach to testing controls related to debt? Ch.13 a. The auditor would test controls for integrated audit purposes, but not for financial statement audit purposes. b. The auditor would test controls for financial statement audit purposes, but not for integrated audit purposes. c. The auditor would test controls for both the integrated audit and financial statement audit. d. The auditor would not test controls for either the integrated audit or financial statement audit.

a. The auditor would test controls for integrated audit purposes, but not for financial statement audit purposes.

Which of the following statements best describes the auditor's typical approach to testing controls related to stockholders' equity accounts? Ch.13 a. The auditor would test controls for integrated audit purposes, but not for financial statement audit purposes. b. The auditor would test controls for financial statement audit purposes, but not for integrated audit purposes. c. The auditor would test controls for both the integrated audit and financial statement audit. d. The auditor would not test controls for either the integrated audit or financial statement audit.

a. The auditor would test controls for integrated audit purposes, but not for financial statement audit purposes.

Which of the following planning analytical relationships is most typically suggestive of a heightened risk of fraud in the acquisition and payment cycle? Ch.11 a. Unexpected increases in gross margin. b. Unexpected decreases in gross margin. c. Inventory that is growing at a rate slower than sales. d. Expense accounts that have significant debit entries.

a. Unexpected increases in gross margin.

The Altman Z‐Score is a model used to help assess the likelihood that a company will go bankrupt. Which of the following ratios is included in the model? Ch.14 a. Working capital to total assets. b. Working capital to total sales. c. Sales to total debt. d. Sales to total accounts receivable.

a. Working capital to total assets.

Which mix of evidence would be most appropriate for the following scenario? Ch.11 Assume a client where the auditor has assessed the risk of material misstatement related to the existence of inventory as high. This client has incentives to overstate income to achieve profit targets that affect management bonuses. Oversight of the vice president of finance is relatively weak because of a lack of supervision by top management. Other controls are effectively designed. a. 100% tests of details. b. 50% tests of details, 30% analytics, 20% tests of controls. c. 30% tests of details, 40% analytics, 30% tests of controls. d. 20% tests of details, 40% analytics, 40% tests of controls.

b. 50% tests of details, 30% analytics, 20% tests of controls.

Which of the following controls would be most useful in providing reasonable assurance about the valuation of tangible long‐lived assets? Ch.12 a. A policy requiring the reconciliation of the physical asset count with the property ledger. b. A policy requiring that deprecation categories and lives be periodically assessed. c. A formal budgeting process. d. Written policies requiring authorization for the acquisition of long‐lived assets.

b. A policy requiring that depreciation categories and lives be periodically assessed.

Refer to Exhibit 11.3 to identify which of the following is a typical control associated with the requisition process for inventory purchases in a just‐in‐time manufacturing process. Ch.11 a. The store manager's ability to issue a purchase order may be subject to overall corporate limits, usually specified in dollars. b. An agreement is signed with the supplier whereby the supplier agrees to ship merchandise according to the production schedule set by the manufacturer. c. Overall authorization to purchase product lines is delegated to individual buyers by the marketing manager. d. The limits for individual goods can be exceeded only on specific approval by the marketing manager.

b. An agreement is signed with the supplier whereby the supplier agrees to ship merchandise according to the production schedule set by the manufacturer.

Which of the following expected relationships is reasonable in terms of performing planning analytical procedures in the acquisition and payment cycle? Ch.11 a. Assume that the company's production and pricing strategies have remained the same during the past year. Gross margin is expected to improve because of the stability. b. Assume that the company has introduced a new product with a low price point and significant customer demand. Inventory turnover is expected to increase and days' sales in inventory is expected to decrease. c. Assume that the company has invested in a new manufacturing process resulting in significantly less waste and overall increases in efficiency during the production process. Cost of goods sold is expected to increase, and gross margin is expected to decrease. d. All of the above are reasonable expected relationships

b. Assume that the company has introduced a new product with a low price point and significant customer demand. Inventory turnover is expected to increase and days' sales in inventory is expected to decrease.

Which of the following statements is false regarding fraud risk related to long‐lived assets? a. A potential fraud scheme involves not removing sold assets from the books. b. Because long‐lived assets are typically an audit area of low risk, auditors do not need to perform brainstorming activities related to long‐lived assets. c. Management might use unreasonably long depreciable lives in an effort to reduce current‐period expenses. d. None of the above statements is false.

b. Because long-lived assets are typically an audit area of low risk, auditors do not need to perform brainstorming activities related to long-lived assets.

Which of the following is a common inherent risk relating to accounts payable and related expenses? Ch.11 a. Management would generally prefer to record assets as expenses. b. Because of debt covenants requiring that the client maintain a certain level of the current ratio, management may prefer to understate accounts payable. c. Ending inventory balances may be valued according to various accounting valuation methods. d. Because of the lower of cost or market requirements, it may be difficult to value accounts payable.

b. Because of debt covenants requiring that the client maintain a certain level of the current ratio, management may prefer to understate accounts payable.

Which of the following is not a typical communication between the auditor and the audit committee at the end of an audit engagement? Ch.14 a. Discussion of the auditor's responsibility. b. Discussion of the client continuance decision. c. Discussion about auditor independence. d. Discussion about management judgments and accounting estimates.

b. Discussion of the client continuance decision.

Which of the following is not an inherent risk typically associated with dividends? Ch.13 a. Dividends are recorded before being declared. b. Dividends are not properly amortized. c. Dividends have not been approved before being declared. d. Dividends are recorded in the wrong period.

b. Dividends are not properly amortized.

As part of auditing equipment, the auditor will inspect new equipment additions selected from the client's property ledger. When performing this procedure, which assertion is the auditor focusing on? Ch.12 a. Completeness. b. Existence. c. Valuation. d. Rights and obligations.

b. Existence.

After the report release date, the auditor may become aware of facts that may have affected the financial statements and auditor's report, had the auditor known the facts at the time of issuance. With regard to this situation, which of the following statements is true? Ch.14 a. Because such facts become known after the report release date, the auditor cannot reasonably be held accountable for these issues; no action is required on the part of the auditor. b. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report, the client is advised to make appropriate and timely disclosure of these new facts. c. If such facts would have been investigated had they been known at the report date, the auditor should determine whether engagement personnel are competent and qualified to perform audits; action is required on the part of the auditor to assess whether engagement personnel should be retained to work on the engagement in the subsequent year. d. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report, the auditor should notify the audit committee immediately; no action beyond this is required on the part of the auditor because of confidentiality concerns.

b. If the auditor decides that steps should be taken to prevent further reliance on the financial statements and audit report, the client is advised to make appropriate and timely disclosure of these new facts.

Which of the following statements is false? Ch.14 a. Management's incentives may bias their willingness to book, or correct, detected misstatements. b. Known misstatements are those that arise from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate. c. Section 10A(b) of the Exchange Act requires auditors to take action upon discovery of an illegal act even if it does not have a material effect on the financial statements, including alerting management and the audit committee. d. The auditor evaluates the misstatements that have been posted to the summary of unadjusted audit differences (SUAD) to determine whether uncorrected misstatements are material—either individually or in combination with other misstatements.

b. Known misstatements are those that arise from differences in judgments of management concerning accounting estimates that the auditor considers unreasonable, or the selection or application of accounting policies that the auditor considers inappropriate.

Which of the following would an auditor typically not perform as part of gaining an understanding of the client's controls related to debt? Ch.13 a. Review the client's documentation of controls. b. Recalculate interest expense. c. Inquire of management about the process for reviewing compliance with debt covenants. d. Review policies related to approval required for new debt.

b. Recalculate interest expense.

Which of the following substantive procedures should be included in the audit program for long‐term debt? Ch.13 a. Verification of the existence of the bondholders. b. Review of debt loan agreements. c. Inspection of the accounts payable master file. d. Review of supporting documentation for credit entries to the bond interest income account.

b. Review of debt loan agreements.

Which of the following situations would lead an auditor to test controls over long‐lived assets? Ch.12 a. Substantive analytical procedures suggested that controls over long‐lived assets were not effective. b. Risk assessment procedures indicated that controls were effectively designed. c. Tests of details identified many errors in recording long‐lived asset transactions. d. The auditor has decided that the additional effort to test controls would not exceed the potential reduction in substantive procedures.

b. Risk assessment procedures indicated that controls were effectively designed.

How does an auditor typically respond to identified risks of material misstatement associated with debt? Ch.13 a. The auditor will typically plan to perform a controls reliance approach to the audit. b. The auditor will typically plan an approach that uses only substantive procedures. c. The auditor does not need to respond to identified fraud risks since the risk of fraud related to debt is typically minimal. d. Because of the low level of risk of material misstatement, the auditor would only rely on planning analytical procedures.

b. The auditor will typically plan an approach that uses only substantive procedures.

How does an auditor typically respond to identified risks of material misstatement associated with equity? Ch.13 a. The auditor will typically plan to perform a controls reliance approach to the audit. b. The auditor will typically plan an approach that uses only substantive procedures. c. The auditor does not need to respond to identified fraud risks since the risk of fraud related to stockholders' equity accounts is typically minimal. d. Because of the low level of risk of material misstatement, the auditor would only rely on preliminary analytical procedures.

b. The auditor will typically plan an approach that uses only substantive procedures.

Which of the following statements concerning review analytical procedures is false? Ch.14 a. Review analytical procedures help auditors assess the overall presentation of the financial statements. b. The auditor's expectations in review analytical procedures should be more precise than those for substantive analytics. c. Auditing standards require the use of review analytical procedures to assist in identifying ending account relationships that are unusual. d. Ratio analysis, common‐size analysis, and analysis of the dollar and percentage changes in each income statement item over the previous year are useful for performing review analytical procedures.

b. The auditor's expectations in review analytical procedures should be more precise than those for substantive analytics.

Which of the following statements is false? Ch.14 a. Disclosure checklists are a convenient documentation format for evidence that the auditor adequately evaluated management's assertions about the adequacy of its disclosures. b. The auditor's report, and assurance therein, covers mandatory disclosures in the basic financial statements and the related notes, along with voluntary disclosures in the MD&A. c. When assessing the adequacy of disclosures, the auditor should have reasonable assurance that the disclosures are understandable to users. d. Disclosure checklists tend to be industry‐specific. e. All of the above are false.

b. The auditor's report, and assurance therein, covers mandatory disclosures in the basic financial statements and the related notes, along with voluntary disclosures in the MD&A.

When a client does not maintain its own stock records, the auditor should obtain written confirmation from the stock transfer agent concerning which of the following? Ch.13 a. Restrictions on the payment of dividends. b. The number of shares issued and outstanding. c. Guarantees of preferred stock liquidation value. d. The number of shares subject to agreements to repurchase.

b. The number of shares issues and outstanding.

Which of the following would the auditor not try to determine about a client's warranty estimate? Ch.13 a. Whether the estimate is reasonable in the circumstance. b. Whether management based the estimate on verifiable, objective assumptions. c. How management developed the estimate. d. Whether the factors and assumptions used by management deviate from historical patterns.

b. Whether management based the estimate on verifiable, objective assumptions.

Which of the following controls should management have in place to provide reasonable assurance about asset impairment judgments? Ch.12 a. A policy requiring the reconciliation of the physical asset count with the property ledger. b. Limits to physical access of long‐lived assets. c. A systematic process to identify assets that are not currently in use. d. A formal budgeting process.

c. A systematic process to identify assets that are not currently in use.

Which of the following controls is related to the payment of inventory purchases? Ch.11 a. Cycle counts. b. A disclosure committee. c. A three‐way match. d. Both a. and c

c. A three-way match.

Which of the following is an important provision of the Foreign Corrupt Practices Act? Ch.14 a. Auditors of clients operating in foreign countries must hire a joint auditor in the foreign country to provide assurance that laws and regulations have been followed by the client. b. Auditors of clients operating in foreign countries must provide reasonable assurance that any inventory observations that occur in the foreign country are observed by at least some audit personnel from the U.S.; this requirement is in place because fraud often occurs in inventory accounts. c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and must design and maintain an adequate system of internal accounting controls. d. Companies that have securities listed on U.S. markets must adhere to the internal control req

c. Companies that have securities listed on U.S. markets must make and keep financial records that accurately and fairly reflect the transactions of the company and must design and maintain an adequate system of internal accounting controls.

Which of the following most accurately describes the nature of fraud related to debt described in the case of Federico Quinto Jr., CPA, presented in the Focus on Fraud feature? Ch.13 a. Interest expense was recorded in the wrong period. b. Entire loan payments were charged to principal. c. Debt covenants and potential violations were not appropriately presented and disclosed. d. Long‐term debt was misclassified as short‐term debt.

c. Debt covenants and potential violations were not appropriately presented and disclosed.

Assume that the auditor decides to only perform substantive tests of details when auditing the equipment account. Which of the following statements best describes the account being audited? Ch.12 a. The client does not have effective controls over equipment. b. The equipment account involves only a few assets of relatively high value. c. Either (a) or (b) could be descriptive the account being audited. d. Neither (a) nor (b) would be descriptive of the account being audited.

c. Either (a) or (b) could be descriptive the account being audited.

Which of the following statements is false concerning engagement quality reviews? Ch.14 a. The purpose of the engagement quality review is to provide reasonable assurance that the audit and audit documentation are complete and that they support the audit opinion on the financial statements. b. The engagement quality review must be documented, and the documentation should include who performed the review, which documents were reviewed, and the date the engagement quality reviewer provided approval of the issuance of the audit opinion. c. Engagement quality reviews are required for both publicly traded companies and private companies in the United States. d. One of the procedures that would be performed during the engagement quality review is to determine if appropriate consultations have taken place on difficult or contentious matters.

c. Engagement quality reviews are required for both publicly traded companies and private companies in the United States.

Which of the following statements is false regarding obtaining evidence about internal control operating effectiveness in the acquisition and payment cycle? Ch.11 a. For integrated audits, the auditor will test the operating effectiveness of important controls as of the client's year‐end. b. The auditor will select controls to test that are important to the auditor's conclusion about whether the client's controls adequately address the assessed risk of material misstatement in the acquisition and payment cycle. c. Evidence of proper payment is not necessary for each purchase and payment, but is only necessary for those that are material. d. The auditor will take a sample of receiving reports and review whether independent counts were made of the goods received.

c. Evidence of proper payment is not necessary for each purchase and payment, but is only necessary for those that are material.

Refer to Exhibit 11.2 to identify the possible inventory or cost of goods sold manipulation that might occur when inventory is sold. Ch.11 a. Overstate returns. b. Overcount inventory. c. Not record cost of goods sold nor reduce inventory. d. Under‐record purchases.

c. Not record cost of goods sold nor reduce inventory.

Which of the following procedures would an auditor most likely perform when auditing management estimates of long‐term liabilities? Ch.13 a. Inquire of management about related party transactions. b. Confirm inventories held at outside warehouses. c. Review past experience of the client related to warranty claims. d. Send confirmations to client vendors.

c. Review past experience of the client related to warranty claims.

Which of the following audit procedures would an auditor use to test the existence assertion for inventory? Ch.11 a. Perform year‐end cutoff tests by noting the last shipping and receiving document numbers used before the client takes physical inventory. b. Make inquiries of the client regarding the segregation of duties between the purchasing department and the receiving department. c. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory. d. Make inquiries of the client regarding allowances made for expected returns.

c. Review the client's proposed physical inventory procedures to determine whether they are likely to result in a complete and correct physical inventory.

Assume that a client's controls over recording retirements of long‐lived tangible assets are not well designed. Which of the following procedures would the auditor plan to perform as a way of responding to the heightened risk of material misstatement? Ch.12 a. Select long‐lived tangible assets recorded in the property ledger and locate them for inspection. b. Inspect long‐lived tangible assets located at the client location and trace those assets to the property ledger. c. Review the tangible long‐lived asset property ledger to see if depreciation was recorded on each tangible long‐lived asset. d. The auditor would perform all of the above procedures to respond to the heightened risk of material misstatement due to poor client controls over recording retirements.

c. Review the tangible long-lived asset property ledger to see if depreciation was recorded on each tangible long-lived asset.

Which of the following statements is true regarding planning analytical procedures for debt and equity? Ch.13 a. Because there are typically only a few stockholders' equity transactions, the auditor is not required to perform planning analytical procedures for stockholders' equity accounts. b. The auditor would not typically perform trend analysis for debt. c. The auditor could consider the long‐term debt‐to‐ equity ratio as part of the planning analytical procedures. d. All of the above statements are true.

c. The auditor could consider the long-term debt-to-equity ratio as part of the planning analytical procedures.

In completing the audit, the auditor communicates with management via the management letter. Which of the following statements is false about management letters? Ch.14 a. The management letter is used to make significant operational or control recommendations to management. b. Many audit firms consider management's inattention to addressing comments in the letter to be an important risk factor in subsequent‐year audits. c. The management letter is required for publicly traded companies in the United States, but not privately held companies. d. All of the above are false.

c. The management letter is required for publicly traded companies in the United States, but not privately held companies.

When auditing intangible assets, the auditor would likely recompute amortization and determine whether management's recorded amount is reasonable. When performing this procedure, which assertion is the auditor focusing on? Ch.12 a. Completeness. b. Existence. c. Valuation. d. Rights and obligations.

c. Valuation.

Which mix of evidence would be most appropriate for the following scenario? Ch.11 Assume a client where the auditor has assessed the risk of material misstatement related to the existence of inventory as low. Top management appears to have a high level of integrity. Management has spent the resources necessary to ensure effective design, implementation, and operation of controls. a. 100% tests of details. b. 70% tests of details, 0% substantive analytics, 20% tests of controls. c. 50% tests of details, 10% substantive analytics, 40% tests of controls. d. 20% tests of details, 40% substantive analytics, 40% tests of controls.

d. 20% tests of details, 40% substantive analytics, 40% tests of controls.

Which of the following is not an inherent risk related to long‐lived asset accounts? Ch.12 a. Failing to record asset disposals. b. Capitalizing repairs and maintenance expense. c. Changing depreciation estimates to manage earnings. d. All of the above are inherent risks related to long‐lived asset accounts.

d. All of the above are inherent risks related to long-lived asset accounts.

Which of the following analyses might an auditor perform as part of planning analytical procedures for long‐lived assets? a. Develop an overall estimate of depreciation expense. b. Compare capital expenditures with the client's capital budget. c. Perform a trend analysis of the ratio of depreciation expense to total depreciable long‐lived tangible assets. d. All of the above could be performed as part of planning analytical procedures.

d. All of the above could be performed as part of planning analytical procedures.

In completing the audit, the auditor should review the adequacy of the disclosures in the financial statements. When assessing the disclosures, the auditor should have reasonable assurance about which of the following? Ch.14 a. The disclosed events and transactions have occurred and pertain to the entity. b. All the disclosures that should have been included are included. c. The disclosures are understandable to users. d. All of the above.

d. All of the above.

In evaluating whether the client is a going concern, which of the following questions should the auditor ask? Ch.14 a. Are there indicators of going‐concern problems? b. Is it likely that management can mitigate any identified going‐concern problems? c. Are disclosures about the going‐concern problems adequate? d. All of the above

d. All of the above.

In obtaining evidence about loss contingencies, which of the following are sources of evidence that the auditor should obtain from management? Ch.14 a. A description and evaluation of contingencies that existed at the balance sheet date. b. Assurance that the accounting and disclosure requirements concerning contingent liabilities have been met. c. Documentation of communication with internal and external legal counsel of the client. d. All of the above.

d. All of the above.

The analytical procedures of the financial statements of Koss Corporation that are depicted in Exhibit 14.3 reveal which of the following indicators of the fraud? Ch.14 a. Cash balances had declined to their lowest level since FYE 2004. b. Cost of goods sold as a percentage of sales had risen sharply over the period, with a particularly significant increase from FYE 2008 to 2009. c. Net income as a percentage of sales had decreased sharply over the period, with a particularly significant decrease from FYE 2008 to 2009. d. All of the above. e. Two of the above (a-c).

d. All of the above.

The auditor has responsibility regarding a client's noncompliance with laws and regulations. Management may try to hide acts involving noncompliance, which limits the auditor's ability to detect such acts. Which of the following are inherent limitations that affect the auditor's ability to detect acts involving noncompliance? Ch.14 a. Laws and regulations often relate to operational issues within the entity that do not necessarily relate to the financial statements, so the information systems relating to financial reporting may not capture noncompliance. b. Management may act to conceal noncompliance, or override controls, or intentionally misrepresent facts to the auditor. c. The legal implications of noncompliance are ultimately a matter for legal authorities to resolve and are not a matter about which the auditor can resolve. d. All of the above.

d. All of the above.

Which of the following can organizations use to obtain financing? Ch.13 a. Notes. b. Mortgages. c. Bonds. d. All of the above.

d. All of the above.

Which of the following is a long‐lived asset? Ch.12 a. Tangible assets such as equipment. b. Intangible assets such as patents. c. Natural resources. d. All of the above.

d. All of the above.

Which of the following is an example of fraud in the acquisition and payment cycle? Ch.11 a. Theft of inventory by an employee. b. Employee schemes involving fictitious vendors as means to transfer payments to themselves. c. Executives recording fictitious inventory or inappropriately recording higher values for existing inventory. d. All of the above.

d. All of the above.

Which of the following tasks will an automated purchasing system perform? Ch.11 a. Apply preloaded specifications and materials lists to the system to start the process. b. Automatically flag invoices that do not reconcile with purchase orders. c. Create change orders and analyze variances from purchase orders. d. All of the above.

d. All of the above.

Which of the following valuation issues are associated with merger and acquisition activity? Ch.12 a. Valuing assets of the acquired organization at their FMV at the time of acquisition. b. Measuring restructuring charges associated with the acquisition. c. Valuing liabilities of the acquired organization at their FMV at the time of acquisition. d. All of the above.

d. All of the above.

Refer to the Why It Matters feature "Inventory Controls at Flow International Corporation." Which of the following represents an implication of weaknesses in the company's controls over inventory? Ch.11 a. The company could not adequately process and account for the valuation of inventory. b. The board of directors fired the CEO because of the internal control deficiencies. c. The company developed a plan to remediate its material weaknesses related to inventory. d. Both a. and c. e. Both a. and b.

d. Both a. and c.

Which of the following most accurately describes the nature of fraud related to equity described in the case of Delphi Corporation presented in the Focus on Fraud feature? Ch.13 a. Stock options were backdated. b. Stock sales were not authorized. c. Proceeds from stock sales were misappropriated. d. Expenses were charged directly to retained earnings, rather than to the appropriate expense accounts.

d. Expenses were charged directly to retained earnings, rather than to the appropriate expense accounts.

The auditor discovers various errors in the client's financial statements during the audit. At the end of the audit, the auditor analyzes these misstatements to determine if the client needs to correct them. In which of the following situations could management and the auditor decide not to correct the misstatement? Ch.14 a. If, by correcting the misstatements, net income would increase rather than decrease. b. If, by correcting the misstatements, net income would decrease rather than increase. c. If the misstatements, in the aggregate, are material. d. If the misstatements, in the aggregate, are immaterial.

d. If the misstatements, in the aggregate, are immaterial.

Which of the following is an example of a Type II subsequent event? Ch.14 a. The client settles a lawsuit for a different amount than was accrued at the balance sheet date. b. A sale of inventory below carrying value provides evidence that the net realizable value was less than cost at year‐end. c. Information becomes available that provides evidence about the valuation of an estimate or reserve that had been accrued at year‐end. d. None of the above.

d. None of the above.

Which of the following is a control the auditor would expect a client to have implemented related to equity? Ch.13 a. A policy requiring approval by the board of directors for all stock transactions. b. Reconciliation of equity accounts to the general ledger. c. CFO and CEO authorization of all stock transactions approved by the board of directors. d. The auditor would typically expect all of the above controls to be in place.

d. The auditor would typically expect all of the above controls to be in place.

In Exhibit 14‐8, "An Example Management Letter to a College Foundation," which of the following items is not present in the management letter? Ch.14 a. The auditor's observations and recommendations to management. b. Management's response. c. The issue of whether or how management responded to the management letter related to the prior year's audit. d. What actions the auditor will take in the subsequent‐ year audit to help management address the identified weaknesses.

d. What actions the auditor will take in the subsequent-year audit to help management address the identified weaknesses.

Which of the following is an inherent risk typically related to debt? a. Debt is not properly authorized. b. Interest expense is not properly accrued. c. Debt covenants are not properly disclosed. d. Debt is not appropriately classified as short or long term. e. All of the above are inherent risks related to debt.

e. All of the above are inherent risks related to debt.

Which of the following audit procedures would an auditor use to test the valuation or allocation assertion for inventory? Ch.11 a. Inquire of production and warehouse personnel about the existence of obsolete inventory. b. Test inventory cost by taking a sample of recorded inventory, and trace to source documents indicating cost of inventory. c. Review trade journals for changes in product technology. d. Inquire of the client about sales adjustments (markdowns) that have been offered to sell any products. e. All of the above.

e. All of the above.

Which of the following techniques can managers use to prevent the outright theft of long‐lived assets? a. Assign accountability for long‐lived assets to specific individuals. b. Conduct physical counts of existing and new long‐lived assets purchased during the year. c. Capitalize transactions that they should expense. d. All of the above. e. Two of the above.

e. Two of the above.

Which of the following are typical planning analytical procedures related to debt? Ch.13 a. Estimate interest expense based on average interest rates and average debt outstanding. b. Calculate the total debt‐to‐equity ratio and perform a trend analysis with prior periods. c. Calculate the long‐term debt‐to‐equity ratio and perform a trend analysis with prior periods. d. Calculate the times interest earned ratio and perform a trend analysis with prior periods. e. The auditor could perform all of the above planning analytical procedures related to debt.

e.. The auditor could perform all of the above planning analytical procedures related to debt.