ch 9, Chapter 8, Chapter 6, Chapter 7

Which of the following are major difficulties auditors face when allocating materiality to balance sheet accounts? A) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes No Yes B) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes Yes No C) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes Yes Yes D) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation No Yes No

A) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes No Yes

When dealing with audit risk: A) auditors accept some level of risk in performing the audit function. B) most risks that auditors encounter are relatively easy to measure. C) the audit risk model is only used for classes of transactions. D) most audit firms prefer to use a quantitative assessment for risk.

A) auditors accept some level of risk in performing the audit function.

11) The written communication stating the auditor cannot guarantee that all acts of fraud will be discovered is found in the A) engagement letter. B) representation letter. C) responsibility letter. D) client letter.

A) engagement letter

If planned detection risk is reduced, the amount of evidence the auditor accumulates will: A) increase. B) decrease. C) remain unchanged. D) be indeterminate.

A) increase.

Inherent risk is often high for an account such as: A) inventory. B) land. C) capital stock. D) notes payable.

A) inventory.

If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2: A) material. B) insignificant. C) significant. D) relevant.

A) material.

Lewis Corporation has a few large accounts receivable that total one million dollars whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of: A) materiality. B) audit risk. C) reasonable assurance. D) comparative analysis.

A) materiality.

3) Initial audit planning involves four matters. Which of the following is not one of these? A) Develop an overall audit strategy. B) Request that bank balances be confirmed. C) Schedule engagement staff and audit specialists. D) Identify the client's reason for the audit.

B) Request that bank balances be confirmed.

1) A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the A) inherent risk. B) acceptable audit risk. C) statistical risk. D) financial risk.

B) acceptable audit risk

Inherent risk and control risk: A) are inversely related to each other. B) are inversely related to detection risk. C) are directly related to detection risk. D) are directly related to audit risk.

B) are inversely related to detection risk.

10) The purpose of an engagement letter is to A) document the CPA firm's responsibility to external users of the audited financial statements. B) document the terms of the engagement. C) notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated. D) emphasize management's responsibility for approving the audit program.

B) document the terms of the engagement.

15) The preliminary audit strategy A) is set before the auditor understands the client's reasons for the audit. B) guides the development of the audit plan. C) is determined after the engagement staffing is set. D) is the detailed steps to be followed for the substantive audit tests.

B) guides the development of the audit plan.

16) The purpose of the requirement in having communication between the predecessor and successor auditors is to A) allow the predecessor to disclose information which would otherwise be confidential. B) help the successor auditor to evaluate whether to accept the engagement. C) help the client by facilitating the change of auditors. D) ensure the predecessor collects all unpaid fees prior to a change in auditor.

B) help the successor auditor to evaluate whether to accept the engagement.

The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as: A) audit risk. B) inherent risk. C) sampling risk. D) detection risk.

B) inherent risk

4) Which is a liquidity activity ratio? A) profit margin B) inventory turnover C) return on assets D) times interest earned

B) inventory turnover

3) _______ is the risk that the financial statements contain a material misstatement due to fraud or error prior to the audit. A) Inherent risk B) Client business risk C) Acceptable audit risk D) Risk of material misstatement

D) Risk of material misstatement

8) For public companies, the ________ is responsible for hiring the auditor as required by the Sarbanes-Oxley Act. A) client's management B) client's chief executive officer C) client's chief financial officer D) client's audit committee

D) client's audit committee

The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related. A) directly B) indirectly C) not D) inversely

D) inversely

Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts. A) less B) no less C) no more D) more

D) more

2) Which of the following would not be classified as an analytical procedure? A) benchmarking the company's profitability ratios against others in the industry B) preparing common size financial statements C) calculating income statement account balances as a percent of sales when the level of sales has changed from the prior year d) In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios.

d) In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios.

Which of the following is not a primary consideration when assessing inherent risk? A) Nature of client's business B) Existence of related parties C) Degree of separation of duties D) Susceptibility to misappropriation of assets

C) Degree of separation of duties

Auditors respond to risk primarily by: I. changing the extent of testing. II. changing the types of audit procedures. A) I only B) II only C) I and II D) neither I nor i

C) I and II

________ misstatements are those where the auditor can determine the amount of the misstatement in the account. A) Potential B) Likely C) Known D) Projected

C) Known

The scope paragraph of the standard unqualified auditor's report states that "... the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement." What type of assurance is given? A) Immediate B) Limited C) Reasonable D) Absolute

C) Reasonable

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________. A) detection risk B) audit report risk C) acceptable audit risk D) inherent risk

C) acceptable audit risk

Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. A) I only B) II only C) both I and II D) neither are true

C) both I and II

4) Smith, CPA, has requested permission to communicate with the predecessor auditor in order to review certain workpapers for high risk accounts for a new audit client. The new audit client's refusal to allow this communication to occur would impact Smith's decision concerning A) the auditor's ability to design audit tests. B) possible scope exception due to lack of access. C) the desirability of accepting the prospective engagement. D) violation of the GAAP rules concerning consistency and comparability of financial information.

C) the desirability of accepting the prospective engagement

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? A) Obtaining client's agreement on the engagement letter B) Obtaining knowledge about the client's business and industry C) Touring the client's plant and offices D) Identifying related parties

A) Obtaining client's agreement on the engagement letter

2) The first phase in planning an audit and designing an audit approach is to A) accept the client and perform initial audit planning. B) set the preliminary judgment of materiality. C) understand the client's business and industry. D) perform preliminary audit procedures.

A) accept the client and perform initial audit planning

9) Which of the following would most likely not be classified as a related-party transaction? A) an advance of one week's salary to an employee B) sales of merchandise between affiliated companies C) loans or credit sales to the principal owner of the client company D) exchanges of equipment between two companies owned by the same person

A) an advance of one week's salary to an employee

Auditors generally allocate the preliminary judgment about materiality to the: A) balance sheet only. B) income statement only. C) income statement and balance sheet. D) statement of cash flows.

A) balance sheet only

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely: A) be reduced. B) be increased. C) remain the same. D) be calculated using a computerized statistical package.

A) be reduced.

5) The auditor uses knowledge gained from the understanding of the client's business and industry to assess A) client business risk. B) control risk. C) inherent risk. D) audit risk.

A) client business risk

3) When performing planning analytical procedures for a client the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should A) investigate the possibility the client may have made an error in their cost of goods sold computation. B) assist management in developing greater cost efficiencies in their product line. C) prepare a going concern opinion for the client. D) advise the client to have extensive disclosure to alleviate investor concerns.

A) investigate the possibility the client may have made an error in their cost of goods sold computation.

When taken together, the concepts of risk and materiality in auditing: A) measure the uncertainty of amounts of a given magnitude. B) measure uncertainty only. C) measure magnitude only. D) measure inherent risk.

A) measure the uncertainty of amounts of a given magnitude

When setting a preliminary judgment about materiality: A) more evidence is required for a low dollar amount than for a high dollar amount. B) less evidence is required for a low dollar amount than for a high dollar amount. C) the same amount of evidence is required for either low or high dollar amounts. D) there is no relationship between it and the dollar amount of evidence needed.

A) more evidence is required for a low dollar amount than for a high dollar amount.

10) Which of the following best describes the corporate minutes of an entity? A) official record of the meetings of the board of directors and the stockholders B) unofficial record of the meeting of the board of directors C) official record of management meeting with investors and creditors of the company D) unofficial record of the board of directors meetings

A) official record of the meetings of the board of directors and the stockholders

13) When analyzing a client's performance measurement system, A) ratio analysis and benchmarking against key competitors are utilized. B) only income statement numbers are used. C) inherent risk of financial statement misstatements may be decreased if the performance measurement system encourages aggressive accounting. D) the auditor is likely to decrease the extent of testing if the client has set unreasonable objectives.

A) ratio analysis and benchmarking against key competitors are utilized.

4) In what order should the following steps occur? A. Set preliminary judgment of materiality and performance materiality. B. Understand the clients business and industry. C. Perform preliminary analytical procedures. D. Accept the client and perform initial audit planning. A) D, B, C, A B) B, A, C, D C) B, D, A, C D) D, C, B, A

A) D, B, C, A

7) Which of the following is an accurate statement regarding a public company's code of ethics? A) A code of ethics is required under The Foreign Corrupt Practices Act. B) A code of ethics is required only for mid-level managers and below. C) The SEC requires companies to disclose amendments and waivers to the code of ethics for the CEO, CFO and principal accounting officer. D) The PCAOB requires companies to review their code of ethics every five years.

C) The SEC requires companies to disclose amendments and waivers to the code of ethics for the CEO, CFO and principal accounting officer.

Which of the following is a correct statement? A) The audit risk model helps in evaluating results. B) Special care must be exercised when the auditor decides on the basis of accumulated evidence that the original assessment of control risk was understated. C) The auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it. D) Performance materiality is part of the audit risk model.

C) The auditor violates due care if he knows that the original assessment of audit risk is inappropriate and he fails to change it.

Why do auditors establish a preliminary judgment about materiality? A) To determine the appropriate level of staff to assign to the audit B) So that the client can know what records to make available to the auditor C) To help plan the appropriate evidence to accumulate D) To finalize the control risk assessment

C) To help plan the appropriate evidence to accumulate

When assessing risk, it is important to remember that: A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients. B) inherent risk can be changed by the auditor. C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined. D) control risk is determined by company management since they are responsible for internal control.

C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined.

An auditor who audits a business cycle that has low inherent risk should: A) increase the amount of audit evidence gathered. B) assign more experienced staff to that area. C) increase the performance materiality level for the area. D) expand planning procedures.

C) increase the performance materiality level for the area.

1) Auditing standards define ________ as the magnitude of misstatements that individually, or when aggregated with other misstatements, could reasonably be expected to influence the economic decisions of users made on the basis of the financial statements. A) fraud B) inherent risk C) materiality D) significant

C) materiality

When allocating performance materiality: A) it is easy to predict in advance which accounts are mot likely to be misstated. B) only overstatements need to be considered. C) professional judgment is critical. D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality.

C) professional judgment is critical.

Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. A) permit B) do not allow C) require D) strongly encourage

C) require

The risk of material misstatement refers to: A) control risk and acceptable audit risk. B) inherent risk. C) the combination of inherent risk and control risk. D) inherent risk and audit risk.

C) the combination of inherent risk and control risk.

13) The two major factors affecting acceptable audit risk are A) inherent risk and the intended uses of the financial statements. B) control risk and the intended uses of the financial statements. C) the likely statement users and their intended uses of the statements. D) the audit firm and the intended uses of the statements

C) the likely statement users and their intended uses of the statements.

12) Auditors should understand client objectives related to A) reliability of financial reporting. B) effectiveness and efficiency of operations. C) compliance with laws and regulations. D) all of the above.

D) all of the above.

Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of: A) regulators. B) the audit firm's managing partner. C) the client shareholders. D) the client.

D) the client

As the risk of material misstatement increases, detection risk should: A) medium increase. B) decrease. C) stay the same. D) Is indeterminate.

B) decrease.

20) When developing the overall strategy for the audit, the auditor will A) decide whether to accept a new client. B) determine if any audit specialists will be required. C) identify why the auditor needs an audit. D) obtain an engagement letter.

B) determine if any audit specialists will be required.

11) Related party A) transactions must be disclosed in the footnotes even if the amounts are immaterial. B) disclosures include the nature of the related party relationship and a description of the transaction. C) transactions are considered arm's-length transactions. D) disclosures are required only for public companies.

B) disclosures include the nature of the related party relationship and a description of the transaction.

7) A written understanding detailing what the auditor expects from the client in performing an audit will normally be expressed in the A) management letter requested by the auditor. B) engagement letter. C) audit Plan. D) audit Strategy for the client.

B) engagement letter.

When evaluating the audit findings, the auditor should be satisfied that the: A) amount of known misstatement is documented in the management representation letter. B) estimate of the total known and likely misstatements is less than a material amount. C) estimate of the total likely misstatement includes sample error. D) amount of known misstatement is acknowledged and recorded by the client.

B) estimate of the total known and likely misstatements is less than a material amount.

18) Which of the following best expresses the understanding of the terms of the engagement that exist between the client and the CPA firm? A) Management asserts there are no errors, material or immaterial, in the general ledger. B) Auditors assert that the primary audit goal is audit efficiency. C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud. D) Management asserts that they will provide the auditor with a risk assessment as to material misstatements due to errors or fraud in the company's financial statements.

C) Auditors assert that their primary responsibility is to plan and perform the audit in order to provide reasonable assurance as to the detection of material misstatement due to error or fraud.

14) An engagement letter sent to a publicly held audit client usually would not include a(n) A) reference to the auditor's responsibility for the detection of errors or irregularities. B) estimation of the time to be spent on the audit work by audit staff and management. C) statement that management advisory services would be made available upon request. D) reference to management's responsibility for the financial statements.

C) statement that management advisory services would be made available upon request

1) In order to obtain an understanding of the client's business, the audit firm will consider A) inherent and control risk of the client. B) audit risk to the CPA firm. C) the client's business risk and the risk of material misstatements in the financial statements. D) the CPA firm's potential ongoing revenue from the audit client.

C) the client's business risk and the risk of material misstatements in the financial statements.

17) The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when A) the predecessor auditor has poor relations with the successor auditor. B) the client is dissatisfied with the predecessor's work. C) there are actual or potential legal problems between the client and the predecessor. D) the predecessor believes that the client lacks integrity.

C) there are actual or potential legal problems between the client and the predecessor

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence. A) directly, inversely B) directly, directly C) inversely, inversely D) inversely, directly

D) inversely, directly

Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following demonstrates this? A) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings Yes Yes B) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings No No C) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings Yes No D) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings No Yes

A) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings Yes Yes

Likely misstatements can result from: A) Computation of the sampling error for the cash account Differences between management's and an auditor's judgment about account balances Projections of misstatements based on an auditor's tests of a sample from a population No Yes Yes B) Computation of the sampling error for the cash account Differences between management's and an auditor's judgment about account balances Projections of misstatements based on an auditor's tests of a sample from a population Yes Yes No C) Computation of the sampling error for the cash account Differences between management's and an auditor's judgment about account balances Projections of misstatements based on an auditor's tests of a sample from a population No No Yes D) Computation of the sampling error for the cash account Differences between management's and an auditor's judgment about account balances Projections of misstatements based on an auditor's tests of a sample from a population Yes No No

A) Computation of the sampling error for the cash account Differences between management's and an auditor's judgment about account balances Projections of misstatements based on an auditor's tests of a sample from a population No Yes Yes

Auditors may assess inherent risk and control risk: A) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model Yes Yes B) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model No No C) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model Yes No D) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model No Yes

A) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model Yes Yes

Which of the following is a correct statement regarding performance materiality? A) Determining performance materiality is necessary because auditors accumulate evidence by segments. B) The level of performance materiality does not affect the amount of evidence needed. C) Performance materiality cannot vary for different classes of transactions. D) Performance materiality is required for public companies, but not for private companies.

A) Determining performance materiality is necessary because auditors accumulate evidence by segments

To what extent do auditors typically rely on internal controls of their public company clients? A) Extensively B) Only very little C) Infrequently D) Never

A) Extensively

Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate. II. is dependent on inherent risk and business risk. A) I only B) II only C) I and II D) None of the above

A) I only

Which of the following statements is not true? A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required. B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required. C) Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls. D) Inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit.

A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required

12) Which of the following normally signs the engagement letter for an audit of a private company? A) management B) board of directors representative C) audit committee representative D) corporate treasurer

A) management

When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: A) reduce acceptable audit risk and increase inherent risk. B) reduce inherent risk and control risk. C) increase inherent risk and control risk. D) increase acceptable audit risk and reduce inherent risk.

A) reduce acceptable audit risk and increase inherent risk.

6) A related party transaction may be indicated when another company A) subsidizes certain operating expenses of the company. B) purchases its securities at their fair value. C) loans to company at market rates. D) has had a distributor relationship with the company for 10 years.

A) subsidizes certain operating expenses of the company.

As the acceptable level of detection risk increases, an auditor may change the: A) timing of substantive tests by performing them at an interim date rather than year end. B) timing of the tests on controls by performing them throughout the year rather than at one time. C) assess the level of inherent risk to a lower amount. D) increase the sample size to achieve a more effective test.

A) timing of substantive tests by performing them at an interim date rather than year end

he five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be: A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4

B) 3, 4, 2

Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts? A) Auditors expect certain accounts to have more misstatements than others. B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. C) Auditors expect to identify overstatements as well as understatements in the accounts. D) Relative audit costs affect the allocation.

B) The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.

Which of the following statements is not correct? A) Materiality is a relative rather than an absolute concept. B) The most important base used as the criterion for deciding materiality is total assets. C) Qualitative factors as well as quantitative factors affect materiality. D) Given equal dollar amounts, frauds are usually considered more important than errors.

B) The most important base used as the criterion for deciding materiality is total assets.

9) Which of the following statements is true regarding communications between predecessor and successor auditors? A) The burden of initiating the communication rests with the predecessor. B) The predecessor's response can be limited to stating that no information will be provided. C) The predecessor should communicate with the successor only if the client is public. D) The predecessor auditor of a public company does not need permission from the client before communicating with the successor auditor.

B) The predecessor's response can be limited to stating that no information will be provided.

If an auditor establishes a relatively high level for materiality, then the auditor will: A) accumulate more evidence than if a lower level had been set. B) accumulate less evidence than if a lower level had been set. C) accumulate approximately the same evidence as would be the case were materiality lower. D) accumulate an undetermined amount of evidence.

B) accumulate less evidence than if a lower level had been set.

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) increase materiality levels. B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk.

B) decrease detection risk.

2) Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because A) of the unique classification of related-party transactions required on the balance sheet. B) of the lack of independence between the parties. C) of the unique classification of related-party transactions required on the income statement. D) it is required by generally accepted accounting principles.

B) of the lack of independence between the parties.

Auditors typically rely on internal controls of their private company clients: A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. B) only if the controls are determined to be effective. C) only if the client asks an auditor to test controls. D) only if the controls are sufficient to increase Control Risk to an acceptable level.

B) only if the controls are determined to be effective.

Auditors are ________ to document the known and likely misstatements in the financial statements under audit. A) permitted B) required C) not allowed D) strongly encouraged

B) required

When allocating materiality, most practitioners choose to allocate to: A) the income statement accounts because they are more important. B) the balance sheet accounts because most audits focus on the balance sheet. C) both balance sheet and income statement accounts because there could be errors on either. D) all of the financial statements because it is required by GAAS.

B) the balance sheet accounts because most audits focus on the balance sheet.

8) An auditor should examine minutes of the board of directors' meetings A) through the date of the financial statements. B) through the date of the audit report. C) only at the beginning of the audit. D) on a test basis.

B) through the date of the audit report

Which is a true statement about audit risk? A) Audit risk measures the risk that a material misstatement could occur and not be detected by internal control. B) When auditors decide on a higher acceptable audit risk, they want to be more certain that the financial statements are not materially misstated. C) Audit assurance is the complement of acceptable audit risk. D) There is an inverse relationship between acceptable audit risk and planned detection risk.

C) Audit assurance is the complement of acceptable audit risk.

Which of the following statements is false? A) Either an overstatement of an asset account or an understatement of a liability account would have the same effect on the income statement. B) A misclassification in the balance sheet will have no effect on operating income. C) Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement. D) Either an understatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

C) Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.

Qualitative factors can affect an auditor's assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. A) I only B) II only C) I and II D) neither I nor II

C) I and II

1) Which of the following is a correct statement regarding analytical procedures? A) A major strength in using industry ratios for auditing is the difference between the nature of the client's financial information and that of the firms making up the industry totals. B) Common-size financial statements display all items as a percentage change from a base year. C) In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios. D) In order to look for a misstatement in the allowance for bad debts, the auditor should divide gross sales by sales returns and allowances.

C) In identifying areas of specific risk, the auditor is likely to focus on the liquidity activity ratios.

Which of the following statements regarding inherent risk is correct? A) Inherent risk is unaffected by the auditor's experience with client's organization. B) Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company. D) Inherent risk is dependent upon the strengths in client's internal control system.

C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.

Which of the following is the primary basis used to decide materiality for a for-profit entity? A) Net sales B) Net assets C) Net income before tax D) All of the above

C) Net income before tax

4) The auditor determines that Matthews Company occupies the 3rd floor of an office tower for which it pays no rent. The most likely explanation is A) they got lucky the landlord hasn't noticed the lack of payments. B) the landlord has weak internal controls over billings. C) a related party transaction in which a major shareholder owns the office tower. D) Matthews Company is engaging in fraudulent activities.

C) a related party transaction in which a major shareholder owns the office tower.

5) An official record of meetings of the board of directors and stockholders is included in the corporate A) bylaws. B) charter. C) minutes. D) license.

C) minutes.

Which of the following statements is true concerning the allocation of preliminary materiality? A) It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. B) Preliminary materiality should be allocated to income statement accounts only. C) Preliminary materiality is required by the SEC. D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement.

D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement.

In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following? A) The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee B) The risk the internal control system will not detect a material misstatement of a financial statement assertion C) The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion D) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

D) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

3) A tour of the client's facilities provides the auditor an opportunity to A) meet key personnel. B) observe operations. C) assess physical safeguards over assets. D) all of the above

D) all of the above

When the auditor is attempting to determine the extent to which external users rely on a client's financial statements, they may consider several factors except for: A) client size. B) concentration of ownership. C) nature and amounts of liabilities. D) assessment of detection risk.

D) assessment of detection risk

6) When dealing with audit risk, A) audit risk should not be a factor when determining if a new client should be accepted. B) audits with a low acceptable audit risk generally result in lower audit fees. C) if management of a company has a reputation of integrity, but is also known to take aggressive financial risks, the auditor should not accept the company as a new client. D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client.

D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the fee proposed to the client.

When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: A) the materiality range. B) the error range. C) tolerable materiality. D) performance materiality.

D) performance materiality.

The risk that audit evidence for a segment will fail to detect misstatements exceeding performance materiality levels is: A) audit risk. B) control risk. C) inherent risk. D) planned detection risk.

D) planned detection risk.

19) When selecting staff for the audit engagement A) only staff members who are CPAs should be assigned to the audit. B) only managers and above need to have appropriate competence and capabilities to perform the audit. C) continuity of staff members from year to year should not be a factor. D) staff assigned to the audit must be knowledgeable about the client's industry.

D) staff assigned to the audit must be knowledgeable about the client's industry.

Which of the following audit risk components may be assessed in non-quantitative terms? A) Control Risk Inherent Risk Detection Risk Yes Yes Yes B) Control Risk Inherent Risk Detection Risk Yes Yes No C) Control Risk Inherent Risk Detection Risk No No Yes D) Control Risk Inherent Risk Detection Risk No No No

a