Ch 3 MC Questions

3.43 The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may a. Allow the internal auditor to perform tests of internal controls b. Allow the internal auditor to audit a major subsidiary of the company c. Not assign any task to the internal auditor because of the internal auditor's lack of independence d. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details

a. Allow the internal auditor to perform tests of internal controls (If the internal auditor is evaluated as both competent and objective; the professional auditing standards allow the independent auditor to perform relatively low risk tests, like certain tests of internal control.)

3.24 Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the a. Current file audit documentation b. Permanent file audit documentation c. Administrative audit documentation in the current file d. Planning memorandum

a. Current file audit documentation (Since this is evidence that relates directly on the year under audit, the current file is appropriate.)

3.28 An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client? a. Schedules and analyses to be prepared by the client's employees b. Methods of statistical sampling the auditor will use c. Specification of litigation in progress against the client d. Client representations about availability of all minutes of meetings of the board of directors

a. Schedules and analyses to be prepared by the client's employees (Client cooperation should be specified in the engagement letter. This is a key purpose of the letter.)

3.40 Which of the following would be considered an analytical procedure? a. Testing purchasing, shipping, and receiving cutoff activities b. Comparing inventory balances to recent sales activities c. Projecting the deviation rate of a statistical sample to the population d. Reconciling physical counts to perpetual records and general ledger balances

b. Comparing inventory balances to recent sales activities (One example of an analytical procedure is when auditors evaluate financial statement accounts by developing expectations about what an account balance should be based on an analysis of relevant financial and nonfinancial data. When examining the inventory balance, the auditor would expect a lower balance if there was significant sales activity. Thus, this is an example of an analytical procedure.)

3.34 An audit plan contains a. Specifications of audit standards relevant to the financial statements being audited b. Specifications of procedures the auditors believe appropriate for the financial statements c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached d. Reconciliation of the account balances in the financial statements with the account balances in the client's general ledger

b. Specifications of procedures the auditors believe appropriate for the financial statements (This is exactly what an audit plan consists of - that is, an audit plan contains specifications of procedures the auditors believe appropriate for the financial statements under audit.)

3.29 When auditing Vandalay Jewlery, Costanza, CPA, was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer to Benes's work in the audit report? a. Yes, the auditors' report should mention the fact that an audit specialist was used b. The auditor's report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions c. The use of an audit specialist need not to be mentioned if the auditors decide not to take responsibility for the audit specialist's findings d. The auditors' report should mention the audit specialist only if Vandalay agrees with the audit specialist's findings

b. The auditor's report should mention the use of the audit specialist only when the audit specialist's finding affect the auditors' conclusions (The auditors' report should only mention the use of the specialist when the specialist's findings affect the auditors' conclusions.)

3.27 Which of the following is an advantage of computer-assisted audit techniques (CAATs)? a. The CAATs programs are all written in one computer language b. The software can be used for audits of clients that use different computer equipment file formats c. The use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures d. The use of CAATs can be substituted for a relatively large part of the required testing

b. The software can be used for audits of clients that use different computer equipment file formats (CAATs can be transported and used on different types of clients that utilize different types of computing systems.)

3.44 Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? a. Staff will need to be rescheduled to cover this new client b. There will be a client-imposed scope limitation c. The firm will have to hire a specialist in one audit area d. The client's financial reporting system has been in place for 10 years

b. There will be a client-imposed scope limitation (This is a major risk factor and is likely to be enough for an auditor to not accept an audit engagement. Why is there a scope limitation required? Is the potential client trying to hide a material fact (or a material misstatement) from the auditor? Given that there is a scope limitation, the auditor would have to think long and hard about whether to accept the engagement.)

3.42 Which of the following statements is correct concerning analytical procedures used in planning an audit engagement? a. They often replace the tests of controls that are performed to assess control risk b. They typically use financial and nonfinancial data aggregated at a high level c. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor d. They are often used to develop an auditor's preliminary judgment about materiality

b. They typically use financial and nonfinancial data aggregated at a high level (The use of financial and nonfinancial data aggregated at a high level is commonly used during preliminary analytical procedures.)

3.22. Generally accepted auditing standards require that auditors always prepare and use a. A written planning memorandum explaining the auditor's understanding of the client's business b. A written client consent to discuss audit matters with prospective auditors c. A written audit plan d. The written time budgets and schedules for performing each audit

c. A written audit plan (A written audit plan is required to be documented by U.S. GAAS (AU-C 300.14).)

3.26 Which of the following is NOT a benefit claimed for the practice of determining materiality of the initial planning stage of an audit? a. Being able to fine-tune the audit work for effectiveness and efficiency b. Avoiding the problem of doing more work than necessary (overauditing) c. Being able to decide early what type of audit opinion to issue d. Avoiding the problem of doing too little work (underauditing)

c. Being able to decide early what type of audit opinion to issue (The kind of opinion to issue cannot be determined until all the evidence is obtained and evaluated.)

3.35 The revenue cycle of a company generally includes which accounts? a. Inventory, accounts payable, and general expenses b. Inventory, general expenses, and payroll c. Cash, accounts receivable, and sales d. Cash, notes payable, and capital stock

c. Cash, accounts receivable, and sales

3.41 Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a. Make inquiries of the client's lawyer concerning pending litigation b. Perform cutoff tests of cash receipts and disbursements c. Compare financial information with nonfinancial operating data d. Recalculate the prior-years' accruals and deferrals

c. Compare financial information with nonfinancial operating data (Comparing the financial information with nonfinancial operating data is a step that may be completed during preliminary analytical procedures. This is done during the planning phase of the audit.)

3.37 Confirmations of accounts receivable provide evidence primarily about which two assertions? a. Completeness and valuation b. Valuation and rights and obligations c. Existence and rights and obligations d. Existence and completeness

c. Existence and rights and obligations (Confirmation of accounts receivable does produce evidence of existence because the customer is admitting that it owes the client money and some evidence of rights to the accounts receivable amount is also supported because the customer is admitting that it owes the client the money (thus, they own the receivable).)

3.36 When auditing the existence assertion for an asset, auditors proceed from the a. Financial statement amounts back to the potentially unrecorded items b. Potentially unrecorded items forward to the financial statement amounts c. General ledger back to the supporting original transaction documents d. Supporting original transaction documents to the general ledger

c. General ledger back to the supporting original transaction documents (By starting with the amounts recorded in the general ledger, you can find evidence of existence of recorded amounts by selecting items that have actually been recorded (in the general ledger) and then examining supporting original transaction documents for the amounts recorded.)

3.23. When planning an audit, which of the following is NOT a factor that affects auditors' decisions about the quantity, type, and content of audit documentation? a. The auditors' need to document compliance with generally accepted auditing standards b. The auditors' need to verify the existence of new sales contracts important for the client's business c. The auditors' judgment about their independence with regard to the client d. The auditors' judgments about materiality

c. The auditors' judgment about their independence with regard to the client (While independence is clearly an important consideration, it is not a factor that dictates the quantity, type and content of audit documentation.)

3.21. When initiating communications with predecessor auditors, prospective auditors should expect a. To take responsibility for obtaining the client's consent for the predecessor to give information about prior audits b. To conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement c. To obtain copies of some or all of the predecessor auditors' audit documentation d. All of the above

d. All of the above

3.33 Prior to accepting a new audit engagement, a public accounting firm should a. Attempt to contact the predecessor auditors b. Evaluate the integrity of management c. Assess the firm's resources to ensure that they are sufficient to permit the firm to accept the engagement d. All of the above

d. All of the above (Prior to accepting a new audit engagement, an audit firm should (a) attempt to contact the predecessor auditor, (b) evaluate the integrity of management, and (c) assess the firm's resources. So, all of the above is the correct response.)

3.31 Which of the following communications is most likely to be written before the balance sheet date? a. A report to the audit committee on the results of testing of internal control over cash receipts b. Confirmation letters to vendors confirming the amounts they owe to the client c. An attorney's letter regarding contingent liabilities d. An engagement letter

d. An engagement letter (An engagement letter would be written before accepting an engagement, and therefore before the balance sheet date.)

3.39 When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? a. Key factors that are consistent with prior periods b. Assumptions that are similar to industry guidelines c. Measurements that are objective and not susceptible to bias d. Evidence of a conservative systematic bias

d. Evidence of a conservative systematic bias (Evidence of a systematic bias, whether aggressive or conservative, would be of most concern to the audit team.)

3.25 An auditor's permanent file audit documentation most likely will contain a. Internal Control analysis b. The most recent engagement letter c. Memoranda of the conference with management d. Excerpts of the corporate charter and bylaws

d. Excerpts of the corporate charter and bylaws (Excerpts of the corporate charter and bylaws would not change often and would therefore likely be found in the permanent file.)

3.32 Which of the following procedures would most likely be performed during planning? a. Surprise counts of the client's petty cash fund b. Reporting internal control deficiencies to the audit committee c. Performing a search for unrecorded liabilities d. Identifying related parties

d. Identifying related parties (Identifying related parties is an important part of the audit planning process.)

3.38 With respect to the concept of materiality, which of the following statements is correct? a. Materiality depends only on the dollar amount of an item relative to other items in the financial statements b. Materiality depends of the nature of a transaction rather than the dollar amount of the transaction c. Materiality is determined by reference to AICPA guidelines d. Materiality is a matter of professional judgment

d. Materiality is a matter of professional judgment (Most definitely, materiality is always a matter of professional judgment.)

3.30 Which of the following engagement planning procedures would most likely assist the auditor in identifying related-parties transactions before the balance-sheet date? a. Interviewing internal auditors about their reporting responsibilities b. Reviewing accounting records for recurring transactions occurring near year-end c. Inspecting communications with the client's legal counsel regarding recorded contingent liabilities d. Scanning the minutes for significant transactions with members of the board of directors

d. Scanning the minutes for significant transactions with members of the board of directors (Scanning the minutes for significant transactions with members of the board of directors would be helpful in identifying transactions with parties related to the client because transactions with board members are likely to be discussed during the board meeting and board members are related parties.)