Audit test 2 Questions

In the consideration of internal control, the operating effectiveness of controls is tested by: A. Flowcharts verification. B. Tests of controls. C. Substantive procedures. D. Decision tables.

B. Tests of controls.

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to the: A. Financial vice-president. B. Corporate controller. C. Audit committee. D. Corporate stockholders

C. Audit committee.

A report on internal control performed in accordance with PCAOB Standard No. 5 includes an opinion on internal control for: A. The entire year. B. The prior quarter. C. The "as-of date." D. The end of each quarter

C. The "as-of date."

A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned assessed level of control risk is at what level? A. Zero. B. Low. C. Moderate. D. Maximum

D. Maximum

An auditor should expect that fair value is the price that would be received to sell an asset in an orderly transaction between the market participants at the: A. Acquisition date of the asset. B. Audit report date. C. Expected replacement date of the asset. D. Measurement date (ordinarily the date of the financial statements).

D. Measurement date (ordinarily the date of the financial statements).

. Which of the following is not a financial statement assertion relating to account balances? A. Completeness. B. Existence. C. Rights and obligations. D. Recorded value and discounts

D. Recorded value and discounts

Tests of controls do not ordinarily address: A. By whom a control was applied. B. How a control was applied. C. The consistency with which a control was applied. D. The cost effectiveness of the way a control was applied.

D. The cost effectiveness of the way a control was applied.

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? A. The prospective client has fired its prior auditor. B. The CPA lacks a thorough understanding of the prospective client's operations and industry. C. The CPA is unable to review the predecessor auditor's working papers due to a major fire that destroyed both hard and soft copy documentation. D. The prospective client is unwilling to make financial records available to the CPA

D. The prospective client is unwilling to make financial records available to the CPA

In auditing an asset valued at fair value, which of the following potentially provides the auditor with the strongest evidence? A. A price for a similar asset obtained from an active market. B. An appraisal obtained discounting future cash flows. C. Management's judgment of the cost to purchase an equivalent asset. D. The historical cost of the asset

A. A price for a similar asset obtained from an active market.

The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes controls related to the reliability of internal and external reporting, the effectiveness and efficiency of operations, and: A. Compliance with applicable laws and regulations. B. Effectiveness of prevention of fraudulent occurrences. C. Safeguarding of entity equity. D. Incorporation of ethical business practice standards

A. Compliance with applicable laws and regulations.

A situation in which the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis is referred to as a: A. Control deficiency. B. Material weakness. C. Reportable condition. D. Significant deficiency.

A. Control deficiency.

A form filed with the SEC when a company changes auditors is a: A. Form 8-K. B. Form 10-K. C. Form S-1. D. Form B-1.

A. Form 8-K.

To best test existence, an auditor would sample from the: A. General ledger to source documents. B. General ledger to the financial statements. C. Source documents to the general ledger. D. Source documents to journals

A. General ledger to source documents.

Which of the following is (are) considered a further audit procedure(s) that may be designed after assessing the risks of material misstatement? Substantive Tests of Details Substantive Analytical Procedures A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D

A. Option A

Failure to detect material dollar errors in the financial statements is a risk which the auditors primarily mitigate by: A. Performing substantive procedures. B. Performing tests of controls. C. Assessing control risk. D. Obtaining a client representation letter

A. Performing substantive procedures.

Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when an auditor is considering a client's risk assessment policies? A. Salaried sales personnel. B. Implementation of a new information system. C. Rapid growth of the organization. D. Corporate restructuring

A. Salaried sales personnel.

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: A. Substantive procedures. B. Tests of controls. C. Internal control. D. Statistical analysis

A. Substantive procedures.

Which of the following is generally true about the sufficiency of audit evidence? A. The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement. B. The amount of evidence concerning a particular account varies inversely with the materiality of the account. C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the account. D. When evidence is appropriate with respect to an account it is also sufficient.

A. The amount of evidence that is sufficient varies directly with the acceptable risk of material misstatement.

A CPA wishes to use a representation letter as a substitute for performing other audit procedures. Doing so: A. Violates professional standards. B. Is acceptable, but should only be done when cost justified. C. Is acceptable, but only for non-public clients. D. Is acceptable and desirable under all conditions

A. Violates professional standards.

Which measure of materiality (or both) considers quantitative considerations? Planning Evaluation A. Yes Yes B. Yes No C. No Yes D. No No

A. Yes Yes

Which of the following is correct concerning requirements about auditor communications about fraud? A.Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. B. All fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through use of an "emphasis of a matter" paragraph added to the audit report. D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

A.Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that material misstatement could have bypassed the client's system of internal control. What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable? A. 5%. B. 12.5%. C. 42.7%. D. 60%.

B. 12.5%.

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed? A. Test of transactions. B. Analytical procedures. C. Test of controls. D. Test of details

B. Analytical procedures.

An unexpected economic downturn is likely to have which effect on inventory turnover. A. Increase. B. Decrease. C. No effect. D. Each of these replies is equally likely

B. Decrease

During financial statement audits, the auditors' consideration of their clients' internal control is integral to both assess the risk of material misstatement and to: A. Assess inherent risk. B. Design further audit procedures. C. Assess compliance with the Foreign Corrupt Practices Act. D. Provide a reasonable basis for an opinion on compliance with applicable laws.

B. Design further audit procedures.

During financial statement audits, auditors seek to restrict which type of risk? A. Control risk. B. Detection risk. C. Inherent risk. D. Account risk.

B. Detection risk.

Auditors must assess fraud risk on every audit and respond to the risks that are identified. Which of the following is not a procedure required to further address the fraud risk of management override of internal control? A. Reviewing accounting estimates for biases. B. Examining physical controls over assets. C. Evaluating the business rationale for significant unusual transactions. D. Examining journal entries and other adjustments for evidence of fraud.

B. Examining physical controls over assets.

The scope of substantive procedures as compared to the scope of tests of controls generally vary: A. In a parallel manner. B. Inversely. C. Directly. D. Equally

B. Inversely.

Which of the following best describes the reason that auditors are concerned with the detection of related party transactions? A. The financial statements must often be adjusted for the effects of material related party transactions. B. Material related party transactions must be disclosed in the notes to the financial statements. C. The substance of related party transactions will differ from their form. D. In a related party transaction one party has the ability to exercise significant influence over the other party.

B. Material related party transactions must be disclosed in the notes to the financial statements.

After considering the client's internal control, the auditors have concluded that it is well-designed and is functioning as anticipated. Under these circumstances, the auditors would most likely: A. Cease to perform further substantive procedures. B. Reduce substantive procedures in areas where the internal control was found to be effective. C. Increase the extent of anticipated analytical procedures. D. Perform all tests of controls to the extent outlined in the preplanned audit plan.

B. Reduce substantive procedures in areas where the internal control was found to be effective.

Which of the following is not an assertion relating to classes of transactions? A. Accuracy. B. Sufficiency. C. Cutoff. D. Classification.

B. Sufficiency

Which of the following ultimately determines the specific audit procedures necessary to provide independent auditors with a reasonable basis for the expression of an opinion? A. The audit time budget. B. The auditors' judgment. C. Generally accepted accounting quality standards. D. The auditors' working papers

B. The auditors' judgment.

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is: A. The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the client's financial statements. B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements. C.The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance sheet. D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the client's financial statements.

The auditors' understanding established with a client should be established through a(an): A. Oral communication with the client. B. Written communication with the client. C. Written or oral communication with the client. D. Completely detailed audit plan.

B. Written communication with the client.

The components of the risk of misstatement are: Inherent Risk Control Risk Detection Risk A. Yes Yes Yes B. Yes Yes No C. Yes No No D. No Yes Yes

B. Yes Yes No

An auditor performs analytical procedures that involve comparing the gross margins of various divisional operations with those of other divisions and with the individual division's performance in previous years. The auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary investigation and also notes that there were no changes in products, production methods, or divisional management during the year. Based on the above information, the most likely cause of the increase in gross margin would be: A. An increase in the number of competitors selling similar products. B. A decrease in the number of suppliers of the material used in manufacturing the product. C. An overstatement of year-end inventory. D. An understatement of year-end accounts receivable.

C. An overstatement of year-end inventory.

The auditors who become aware of an internal control significant deficiency are required to communicate this to the: A. Client's legal counsel. B. Compensation committee. C. Audit committee. D. Internal auditors.

C. Audit committee.

Management is concerned about the lower level of profitability in the Mid-Central Region. Which of the following would be a reasonable possible explanation(s) of the lower profitability for the Mid-Central Region? I. The lower number of stores in the Mid-Central Region. II. Sales employees are not as productive in generating sales as those in other regions. III. The Mid-Central Region has a lower gross margin. A. I only. B. II only. C. II and III only. D. I, II and III.

C. II and III only.

Fraudulent sales and accounts receivables recorded at year-end (with no cost of goods sold entry) will: A. Decrease recorded net income. B. Decrease the current ratio. C. Increase days of sales in accounts receivable. D. Increase year-end recorded inventory.

C. Increase days of sales in accounts receivable.

To test for unsupported entries in the journals, the direction of audit testing should be to the: A. Ledger entries. B. Journal entries. C. Original source documents. D. Financial statements.

C. Original source documents.

At least what level of probability of a material misstatement is required for a control deficiency to be considered a material weakness? A. More than remote. B. Probable. C. Reasonable possibility. D. Sufficient.

C. Reasonable possibility.

Which of the following is a basic approach often used by auditors to evaluate the reasonableness of accounting estimates? A. Confirmation. B. Observation. C. Reviewing subsequent events or transactions. D. Analyzing corporate organizational structure

C. Reviewing subsequent events or transactions.

Assertions with high inherent risk are least likely to involve: A. Complex calculations. B. Difficult accounting issues. C. Routine transactions. D. Significant judgment by management

C. Routine transactions.

For effective internal control, which of the following functions should not be assigned to the company's accounting department? A. Reconciling accounting records with existing assets. B. Recording financial transactions. C. Signing payroll checks. D. Preparing financial reports

C. Signing payroll checks.

Which of the following audit tests would be regarded as a test of control? A. Tests of the specific items making up the balance in a given general ledger account. B. Tests confirming receivables. C. Tests of the signatures on canceled checks to board of director's authorizations. D. Tests of the additions to property, plant, and equipment by physical inspection.

C. Tests of the signatures on canceled checks to board of director's authorizations.

The auditors must obtain written client representations that normally should be signed by: A. The president and the chairperson of the board. B. The treasurer and the internal auditor. C. The chief executive officer and the chief financial officer. D. The corporate counsel and the audit committee chairperson

C. The chief executive officer and the chief financial officer.

Which of the following is true about analytical procedures? A. Performing analytical procedures results in the most reliable form of evidence. B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control. C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to the reasonableness of specific account balances. D. Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements

D. Analytical procedures are used in risk assessment, as a substantive procedure for specific accounts, and near the completion of the audit of the audited financial statements

Which of the following is not ordinarily a procedure for documenting an auditor's understanding of internal control for planning purposes? A. Checklist. B. Flowchart. C. Questionnaire. D. Confirmation

D. Confirmation

Which of the following is least likely to be considered an appropriate response relating to risks the auditors identify at the financial statement level? A. Assign more experienced staff. B. Incorporate additional elements of unpredictability in the selection of audit procedures. C. Increase the scope of auditor procedures. D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

D. Emphasize the need to remain neutral, rather than to exercise professional skepticism.

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: A. Account risk. B. Control risk. C. Detection risk. D. Inherent risk.

D. Inherent risk.

A material weakness involves an amount that could result in a misstatement that is: A. Smaller than inconsequential. B. Larger than inconsequential. C. Tolerable. D. Material

D. Material

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice A. Eliminates the use of certain statistical sampling methods that would otherwise be available. B. Presumes that the auditor will reperform the tests as of the balance sheet date. C. Should be especially considered when there are rapidly changing economic conditions. D. Potentially increases the risk that errors which exist at the balance sheet date will not be detected

D. Potentially increases the risk that errors which exist at the balance sheet date will not be detected

A control deficiency that is less severe than a material weakness, but important enough to merit attention by those responsible for oversight of the company's financial reporting is referred to as a(n): A. Control deficiency. B. Inherent limitation. C. Reportable deficiency. D. Significant deficiency.

D. Significant deficiency.

Which is most likely when the assessed level of control risk increases? A. Change from performing substantive procedures at year-end to an interim date. B.Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. C. Use the maximum number of dual purpose tests. D. Use larger sample sizes for substantive procedures

D. Use larger sample sizes for substantive procedures

Assertions that have a meaningful bearing on whether an account balance, transaction class, or disclosure is fairly stated are referred to as: A. Appropriate assertions. B. Sufficient assertions. C. Relevant assertions. D. Reliable assertions.

c. Relevant Assertions