Auditing: Chapter 5

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

a. A large amount of assets.

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

b. Copies of sales invoices inspected by auditors.

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

b. Effectiveness of internal control.

When writing an internal memo, it is typical to double space and indent at the beginning of each paragraph. a. True b. False

b. False

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

b. Permanent working paper file.

Which of the following is the correct formula for the accounts receivable turnover ratio? a. Revenue divided by 365 b. Revenue divided by average accounts receivable c. Revenue divided by average inventory d. 365 divided by total credit sales

b. Revenue divided by average accounts receivable

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

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

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

c. Unusual transactions

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

d. Support the auditor's opinion.