Audit chapter 9

Which of the following procedures would provide the most reliable audit evidence? a. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources. b. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls. c. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor. d. Audit evidence provided by copies is more reliable than that provided by facsimiles.

a. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent source

How would an auditor of a nonissuer most appropriately respond to a heightened assessed risk of material misstatement? a. By assigning more experienced staff or those with specialized skills to high-risk areas. b. By obtaining a management representation letter. c. By performing tests of controls at interim-and period-end dates. d. By performing analytical procedures, but not substantive procedures, at period end.

a. By assigning more experienced staff or those with specialized skills to high-risk areas

Which of the following procedures would provide the most reliable audit evidence? a. Inspection of bank statements obtained directly from the client's financial institution. b. Inquiries of the client's internal audit staff held in private. c. Inspection of prenumbered client purchase orders filed in the vouchers payable department. d. Analytical procedures performed by the auditor on the entity's trial balance.

a. Inspection of bank statements obtained directly from the client's financial institution.

Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures? a. There is heightened risk of fraud. b. Client has a strong internal control environment. c. Unpredictability provides the audit team with more variety. d. Client was not audited in the previous year.

a. There is heightened risk of fraud.

A significant risk is _______. a. an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration b. an identified and assessed risk of immaterial misstatement that, in the auditor's judgment, requires special audit consideration c. a risk for which the auditor should immediately notify the SEC d. a risk that the auditor should not attempt to address

a. an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement state that auditors _______. a. are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase b. are required to perform tests of controls for all relevant assertions that have been identified during the risk assessment phase c. should notify the client immediately of a change in fee structure pertaining to the audit d. are required to perform substantive procedures for all relevant assertions that have been identified after issuance of the audit opinion

a. are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase

Once the final outcome of a transaction or event occurs _______. a. it is expected that there will be a difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements b. the amount should be adjusted to match the estimated balance c. the auditor should not concern themselves with investigating abnormally large variances d. it is expected that there will be no difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements

a. it is expected that there will be a difference between the outcome of the accounting estimate and the amount originally recognized or disclosed in the financial statements

The difference between what is reported in the client prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework is called _______. a. misstatement b. projected estimate c. accumulated inaccuracy d. auditing misappropriation

a. misstatement

Every audit will involve _______. a. some amount of substantive testing because audit standards require it for relevant assertions b. conflicts with management pertaining to estimates c. no substantive testing because audit standards require it not to be conducted for relevant assertions d. relying on the internal audit function for production of evidentiary matter

a. some amount of substantive testing because audit standards require it for relevant assertions

The cutoff assertion for sales means _______. a. that transactions have been recorded in the proper accounting period b. that transactions are being recorded in the correct accounts c. that the auditor should check to make sure sales are being shipped to the correct client customers d. that sales should be limited to certain clients who may not have the ability to pay

a. that transactions have been recorded in the proper accounting period

Estimation uncertainty is defined as _______. a. the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement b. the uncertainty surrounding which staff members to assign to a particular audit c. the uncertainty surrounding the ultimate cost of the audit d. the susceptibility of an accounting estimate and related disclosures to be accurate

a. the susceptibility of an accounting estimate and related disclosures due to an inherent lack of precision in its measurement

After auditors have completed testing controls and drawn a conclusion about control risk, _______. a. they make decisions about the nature, timing, and extent of substantive testing b. they are ready to issue the audit opinion c. they should withdraw if control risk is assessed as high d. they make decisions about the nature and timing of substantive testing

a. they make decisions about the nature, timing, and extent of substantive testing

Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure? a. Completeness. b. Cutoff. c. Rights and obligations. d. Accuracy.

b. Cutoff.

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement provide which of the following examples of responding to risk at the financial statement level? a. Assign less experienced staff to areas of higher risk of material misstatement b. Include more elements of unpredictability in the selection of audit procedures c. Provide less supervision d. Emphasize that audit team members should not attempt to maintain professional skepticism

b. Include more elements of unpredictability in the selection of audit procedures

Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period? a. Internal controls are strong and the risk of material misstatement is low. b. Internal controls are weak and the risk of material misstatement is high. c. Internal controls are weak and the risk of material misstatement is low. d. Internal controls are strong and the risk of material misstatement is high.

b. Internal controls are weak and the risk of material misstatement is high.

Which of the following is an audit procedure in response to assessed risks? a. Changing the recalculating procedures applied in financial statements b. Making changes to the nature, timing, or extent of audit procedures to obtain more persuasive evidence c. Developing an understanding of the entity's control environment d. Designing and implementing appropriate responses to financial statements

b. Making changes to the nature, timing, or extent of audit procedures to obtain more persuasive evidence

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit? a. The use of tests of controls should be considered without regard to the level of assurance required. b. The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment. c. Tests of details typically provide a low level of assurance. d. Analytical procedures are an inefficient means of obtaining assurance.

b. The procedures to be applied on a particular engagement are a matter of the auditor's professional judgment.

A misstatement is defined as _______. a. the auditor incorrectly billing the client for work that was not performed b. a difference between what is reported in the client prepared financial statements with what is required for the item to be presented fairly in accordance with the applicable financial reporting framework c. there being no difference between what is reported in the client d. prepared financial statements and what is required for the item to be presented fairly in accordance with the applicable financial reporting framework d. variances that only occur in the interim financial statements

b. a difference between what is reported in the client prepared financial statements with what is required for the item to be presented fairly in accordance with the applicable financial reporting framework

Management bias is defined as _______. a. evidence of neutrality by management in the preparation and fair presentation of information b. a lack of neutrality by management in the preparation and fair presentation of information c. management 'opinion' shopping' among auditors for their desired opinion d. management hiring selectively for certain key positions

b. a lack of neutrality by management in the preparation and fair presentation of information

An auditor mailing positive confirmations is an example of _______. a. a compilation engagement b. a substantive procedure c. a review engagement d. a test of internal control

b. a substantive procedure

Financial statements include _______. a. a variety of items that cannot be measured precisely and must be estimated by the internal auditors b. a variety of items that cannot be measured precisely and must be estimated by client management c. a variety of items that can be measured precisely and should not be estimated by client management d. a variety of items that can be measured precisely and must be estimated by client management

b. a variety of items that cannot be measured precisely and must be estimated by client management

An accounting estimate is _______. a. a figure that should be left to the external auditor to determine at the end of the year b. an approximation of a monetary amount when a precise means of measurement is not available c. prohibited by GAAP and should be questioned by the auditor d. an exact monetary amount when a precise means of measurement is available

b. an approximation of a monetary amount when a precise means of measurement is not available

When conducting a substantive analytical procedure, _______. a. auditors develop an expectation, or estimate, using data in the client's records or data from reliable internal sources, and then compare the expectation with the client's recorded amount. b. auditors develop an expectation, or estimate, using data in the client's records or data from reliable outside sources, and then compare the expectation with the client's recorded amount. c. the procedure should be approved by management before hand d. auditors develop an expectation, or estimate, using data in the auditor's records or data from reliable outside sources, and then compare the expectation with the client's recorded amount

b. auditors develop an expectation, or estimate, using data in the client's records or data from reliable outside sources, and then compare the expectation with the client's recorded amount.

When analyzing the results of substantive procedures, auditors should beware of: a. weak internal controls. b. confirmation bias. c. professional skepticism. d. audit engagement deadlines.

b. confirmation bias.

For clients with multiple locations, the auditors_______. a. could vary which locations are tested each year and not change the type of audit procedures that are performed at the different locations b. could vary which locations are tested each year and the type of audit procedures that are performed at the different locations c. could not vary which locations are tested each year, but instead vary the type of audit procedures that are performed at the different locations d. should always hire another auditor to check other locations, and not attempt to do this themselves

b. could vary which locations are tested each year and the type of audit procedures that are performed at the different locations

Two things that auditors do with misstatements during the audit are _______. a. documenting and referring them to the internal auditors b. documenting and accumulating them c. accumulating and immediately correcting them d. documenting and referring them to senior management

b. documenting and accumulating them

Some substantive procedures can only be performed at year-end _______. a. because there have been no transactions occurring in these accounts during the year b. due to the nature of the assertion or the timing of the transactions c. due to management not allowing the auditors access beforehand d. once the internal audit function has completed its preliminary testing of the account

b. due to the nature of the assertion or the timing of the transactions

The extent of substantive procedures refers to _______. a. the extent to which management agree with the procedures performed b. how much testing will be performed within a class of transactions or account balance c. the extent of the cost associated with performing a particular audit procedure d. how much testing will be performed outside of a class of transactions or account balance

b. how much testing will be performed within a class of transactions or account balance

Accounting estimates, by their nature _______. a. should not be estimated by management, but rather by the auditor at the end of the period b. involve subjective decision making on the part of management c. involve objective decision making on the part of management d. should cause little or no variance at the end of the period

b. involve subjective decision making on the part of management

The nature of an audit procedure refers to _______. a. its timing (test of controls only) and its type b. its purpose (test of controls or substantive procedure) and its type c. its extent (test of controls or substantive procedure) and its type d. its timing (test of controls or substantive procedure) and its type

b. its purpose (test of controls or substantive procedure) and its type

The nature of an audit procedure refers to: a. the sample size required to perform the procedure. b. its purpose and its type. c. when the procedure is performed. d. the assessed level of detection risk.

b. its purpose and its type.

A factor that auditors consider when determining the type of substantive procedure to use is _______. a. the cost of the procedure, and if management will be able to afford it b. the assessed level of risk for the assertion c. the recommendations of management d. the assessed level of risk for the control

b. the assessed level of risk for the assertion

The use of a substantive analytical procedure may be more appropriate and provide more persuasive audit evidence depending on _______. a. whether management agrees with its use b. the nature of the assertion c. the nature of the control d. whether the internal auditors are able to confirm the evidence

b. the nature of the assertion

In general, accounting estimates with a high degree of estimation _______. a. uncertainty pose no risk of material misstatement b. uncertainty pose a greater risk of material misstatement c. uncertainty pose a smaller risk of material misstatement d. serve to lower inherent risk

b. uncertainty pose a greater risk of material misstatement

All of the following are initial procedures performed on an account balance except: a. agreeing the opening balance to the audited ending balance from the prior year's working papers. b. vouching items from the trial balance to supporting documentation. c. scanning account details for unusual items. d. footing a trial balance for mathematical accuracy.

b. vouching items from the trial balance to supporting documentation.

What are substantive procedures? a. Audit procedures applied to gather appropriate relevant and reliable data b. Audit procedures that are applied when internal controls are not functioning as designed c. Audit procedures designed to detect material misstatements at the assertion level d. Audit procedures designed to aid testing controls

c. Audit procedures designed to detect material misstatements at the assertion level

Which of the following would not be a reason to increase the extent of a substantive test? a. The risk of material misstatement is high. b. Internal controls are weak. c. Auditors have time to test more items. d. Qualitative factors suggest there may be errors in the account.

c. Auditors have time to test more items.

Which of the following ultimately determines the sufficiency and appropriateness of audit evidence to support the auditor's conclusions? a. Professional standards. b. Professional experience. c. Professional judgment. d. Professional requirements.

c. Professional judgment.

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? a. Relationships involving balance sheet accounts b. Data subject to audit testing in the prior year c. Relationships involving income statement accounts d. Transactions subject to management discretion

c. Relationships involving income statement accounts

A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Smaller expected frequency of errors. b. Greater reliance on analytical procedures. c. Smaller measure of tolerable misstatement. d. Greater reliance on internal control.

c. Smaller measure of tolerable misstatement.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? a. The planned level of control risk. b. The effectiveness of internal controls. c. The planned level of assurance at the relevant assertion level. d. Management's assertions that internal controls exist and are operating efficiently.

c. The planned level of assurance at the relevant assertion level.

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatements Measure of tolerable misstatement a. No Yes b. Yes No c. Yes Yes d. No No

c. Yes Yes

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states the objective of the auditor is to obtain sufficient appropriate evidence that _______. a. the accounting estimates are reasonable b. disclosures are adequate c. accounting estimates are reasonable, and disclosures are adequate d. accounting estimates are reasonable, but disclosures are not adequate

c. accounting estimates are reasonable, and disclosures are adequate

AU-C 330 Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained and AS 2301 The Auditor's Responses to the Risks of Material Misstatement state that _______. a. auditors are required to perform substantive procedures for all relevant assertions that have been identified during the report issuance phase b. the accounting qualities of faithful representation and comparability are immaterial to the audit c. auditors are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase d. the auditors must always confer with the prior auditor before issuance of any audit report

c. auditors are required to perform substantive procedures for all relevant assertions that have been identified during the risk assessment phase

A dual-purpose test _______. a. involves the auditor being able to bill the client for two tests when only one was performed b. involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on different transactions c. involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on the same transaction d. involves satisfying informational requests from management and the client's legal counsel simultaneously

c. involves the auditors designing a test of controls and a substantive test of details to be performed at the same time on the same transaction

The auditor's best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a: a. factual misstatement. b. confirmation misstatement. c. projected misstatement. d. judgmental misstatement.

c. projected misstatement.

One method of selecting specific items from a population when testing for overstatement is to _______. a. allow management to select them b. allow the internal auditors to select them c. select items that are over a certain dollar amount d. select items that are identical dollar amounts

c. select items that are over a certain dollar amount

The objective of auditors is to obtain _______. a. sufficient appropriate audit evidence from internal control only regarding the assessed risks of material misstatement b. sufficient appropriate audit evidence regarding the assessed risks of immaterial misstatement c. sufficient appropriate audit evidence regarding the assessed risks of material misstatement d. insufficient appropriate audit evidence regarding the assessed risks of material misstatement

c. sufficient appropriate audit evidence regarding the assessed risks of material misstatement

AU-C 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures states _______. a. the objective of the internal auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate b. the objective of the auditor is to obtain sufficient appropriate evidence that disclosures are adequate only c. the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate d. the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable only

c. the objective of the auditor is to obtain sufficient appropriate evidence that accounting estimates are reasonable and disclosures are adequate

Designing substantive procedures responds to: a. the risk of all types of misstatements at the entity level. b. the risk of material misstatement at the entity level. c. the risk of material misstatement at the assertion level. d. the risk of all types of misstatements at the assertion level.

c. the risk of material misstatement at the assertion level.

Before auditors can use substantive analytical procedures, _______. a. they must be ready to issue the preliminary audit opinion b. they must consider the availability and reliability of data to be used to develop their audit opinion c. they must consider the availability and reliability of data to be used to develop their expectation d. they must be approved by the internal auditors before hand

c. they must consider the availability and reliability of data to be used to develop their expectation

The term "substantive" comes from _______. a. the fact that the audit report is designed to assist stockholders with substantial stock holdings in the client b. "insubstantial," which means auditors gather evidence to support only insubstantial transactions, account balances, and disclosures provided by management in the financial statements c. "insubstantial," which means auditors gather evidence to support the transactions, account balances, and disclosures provided by management in the financial statements d. "substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements

d. "substantiate," which means auditors gather evidence to verify the transactions, account balances, and disclosures provided by management in the financial statements

Examples of substantive procedures performed to test the reasonableness of accounting estimates include: a. Inquiry about the method of measurement b. Inquiry about assumptions used by management c. Recalculate the accounting estimate d. All of these answer choices are correct

d. All of these answer choices are correct

A misstatement could occur _______. a. with an account balance b. with a transaction c. with a classification d. All of these answer choices are correct.

d. All of these answer choices are correct.

AU-C Section 450 Evaluation of Misstatements Identified During the Audit describes misstatements as _______. a. Factual misstatements b. Judgmental misstatements c. Projected misstatements d. All of these answer choices are correct.

d. All of these answer choices are correct.

An example of possible management bias would be _______. a. changes in the method of making the accounting estimate that are based on subjective assumptions b. using management's own assumptions for fair value estimates when they are inconsistent with readily observable market assumptions c. selecting or developing significant assumptions that yield an estimate more favorable for management's objectives d. All of these answer choices are correct.

d. All of these answer choices are correct.

Examples of causes of misstatements include which of the following? a. Intentional or unintentional omission of an amount or disclosure b. Incorrect accounting estimate caused by a misinterpretation of facts or by management bias c. Inappropriate selection of accounting policies d. All of these answer choices are correct.

d. All of these answer choices are correct.

Examples of initial procedures that an auditor may perform include _______. a. Trace beginning balances to working papers from the prior year's audit. b. Scan the transactions in the account for unusual items. c. Obtain a trial balance or other detailed report for the account. d. All of these answer choices are correct.

d. All of these answer choices are correct.

Examples of substantive procedures include _______. a. observation. b. inquiry. c. confirmation. d. All of these answer choices are correct.

d. All of these answer choices are correct.

The amount of estimation uncertainty is affected by _______. a. the nature of the accounting estimate b. the subjectivity of the assumptions used to make the estimate c. the extent to which a generally accepted method or model is available to aid in developing the estimate d. All of these answer choices are correct.

d. All of these answer choices are correct.

Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed? a. Confirmations of receivables verifying account balances. b. Attorneys' responses to the auditor's inquiries. c. Letters of representations corroborating inventory pricing. d. Client records documenting the use of computer programs.

d. Client records documenting the use of computer programs.

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should: a. Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing. b. Obtain written representations from management that all financial records and related data will be made available. c. Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole. d. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

d. Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

In which of the following misstatements is there no doubt because there is no element of judgment involved? a. Accumulated misstatements b. Projected misstatements c. Auditing misstatements d. Factual misstatements

d. Factual misstatements

In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that a. Exists because of nonstatistical sampling performed by the auditor. b. Arises from a routine calculation. c. Arises from a flaw in the accounting system. d. Involves an estimate.

d. Involves an estimate.

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness? a. Develop independent expectations of management's estimates. b. Test the calculations used by management in developing the estimates. c. Consider the appropriateness of the key factors or assumptions used in preparing the estimates. d. Obtain an understanding of how management developed its estimates.

d. Obtain an understanding of how management developed its estimates.

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? a. Determine whether accounting estimates deviate from historical patterns. b. Confirm inventories at locations outside the entity. c. Inquire about the existence of related party transactions. d. Review the lawyer's letter for information about litigation.

d. Review the lawyer's letter for information about litigation.

A senior auditor conducted a dual-purpose test on a client's invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed? a. Substantive procedures and analytical procedures b. Substantive analytical procedures and tests of controls c. Tests of details and substantive procedures d. Tests of controls and tests of details

d. Tests of controls and tests of details

An audit strategy can take _______. a. neither a reliance on controls approach, nor a substantive approach b. a reliance on procedures approach, a substantive approach, or a combination of both c. an approach whereby only internal control is audited d. a reliance on controls approach, a substantive approach, or a combination of both

d. a reliance on controls approach, a substantive approach, or a combination of both

In order to obtain more reliable evidence, _______. a. the auditors should request the internal audit function generate it b. the auditors should request that management generate it c. auditors should only rely on internally generated evidence d. auditors must exercise professional skepticism and be prepared to modify the planned audit procedures as needed

d. auditors must exercise professional skepticism and be prepared to modify the planned audit procedures as needed

Roll-forward procedures relate to _______. a. any substantive procedure performed after the balance sheet date b. any procedure carried out by the auditor to update their audit findings through the date of the audit report c. auditors updating their audit findings from year-end through an interim period d. auditors updating their audit findings from an interim period through year-end

d. auditors updating their audit findings from an interim period through year-end

Assertions about account balances at year-end typically include _______. a. accuracy, valuation, and occurrence b. existence, completeness, and allocation c. existence, occurrence, and cutoff d. existence, completeness, and rights and obligations

d. existence, completeness, and rights and obligations

Assertions about classes of transactions and events typically include _______. a. completeness, accuracy, and valuation b. existence, rights, and obligations c. existence, rights, and cutoff d. occurrence, cutoff, and completeness

d. occurrence, cutoff, and completeness

When auditors are performing substantive procedures and identify misstatements they did not expect, they _______. a. reconsider their audit strategy and audit plan, and determine if the nature, timing, or extent of internal control testing needs to be modified b. should seek to obtain written representations from management as to the accuracy of the balances in question c. should consider withdrawing from the engagement d. reconsider their audit strategy and audit plan, and determine if the nature, timing, or extent of substantive procedures need to be modified

d. reconsider their audit strategy and audit plan, and determine if the nature, timing, or extent of substantive procedures need to be modified

When analytical procedures are used to obtain audit evidence during the risk response phase, _______. a. they are referred to as tests of internal control b. management should be allowed to select the procedures and tests c. the audit report is ready to be issued d. they are referred to as "substantive analytical procedures."

d. they are referred to as "substantive analytical procedures."