Chapter 6 Test 2 audit
When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that
- the transactions are related to financing a company rather than to its operations. - most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively.
Which of the following statements is the most correct regarding errors and fraud?
An error is unintentional, whereas fraud is intentional.
Which of the following statements is usually true?
An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.
________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value.
Anchoring
Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements?
Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
Which of the following statements is not true?
Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.
Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?
Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization.
________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions).
Occurrence; completeness
Which of the following is an accurate statement about professional skepticism?
Professional skepticism involves a critical assessment of the evidence.
Which of the following statements is true of a public company's financial statements?
Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.
________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions.
Self-esteem
________ are used as evidence to provide assurance about an account balance.
Substantive analytical procedures
In describing the cycle approach to segmenting an audit, which of the following statements is not true?
The "inventory and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles.
Why does the auditor divide the financial statements into segments around the financial statement cycles?
The approach aids in the assignment of tasks to different members of the audit team.
Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?
The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.
Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?
The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.
Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?
The general audit objectives are applicable to every class of transactions.
Why does the auditor divide the financial statements into smaller segments?
Using the cycle approach makes the audit more manageable.
An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and
a critical assessment of the audit evidence.
One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious.
a search for knowledge
Which balance sheet accounts are included in the payroll and personnel cycle?
accrued payroll, cash in bank, and accrued payroll taxes
The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction-related audit objective?
accuracy
Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion.
accuracy and valuation
The posting and summarization audit objective is the auditor's counterpart to management's assertion of
accuracy.
When the auditor becomes aware of or suspects noncompliance with laws and regulations
all of the above
An auditor discovers that the company's bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of
an error.
If a client has violated federal tax laws,
and the amount is significant, the auditor should communicate with those charged with governance.
Which of the following statements is not correct?
approach the auditor selects.
The detail tie-in objective is not concerned that the details in the account balance
are properly disclosed in accordance with GAAP.
When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will
articulate in written form the rationale of their judgment.
Which of the following is not one of the AICPA categories of assertions?
assertions about financial statements and correspondence to GAAP
International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements?
assertions about the quality of source documents used to prepare the financial statements
If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct,
audits would not be economically practical.
One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others
autonomy
If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor
can significantly reduce other substantive tests.
The most important general ledger account included in and affecting several cycles is the
cash account.
Misappropriation of assets
causes harm to stockholders because the assets are no longer available to their rightful owners.
If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the
classification assertion.
Fraudulent financial reporting is most likely to be committed by whom?
company management
The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the
company management.
Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"?
completeness
When an auditor knows that an illegal act has occurred, she must
consider the effects on the financial statements, including the adequacy of disclosure.
Which of the following is the auditor least likely to do when aware of an illegal act?
contact the local law enforcement officials regarding potential criminal wrongdoing
The term audit objective refers to all of the following except for
cycle-related audit objectives.
Which of the following is not a step in the professional judgment process?
determine the type of audit opinion
Management assertions are
directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.
Another term for misappropriation of assets is
employee fraud.
When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
equally on discovering errors and employee fraud.
Management makes the following assertions about account balances:
existence, completeness, valuation and allocation, and rights and obligations.
In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is
greater for management fraud because of management's ability to override existing internal controls.
If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor
has the responsibility of notifying financial statement users through the auditor's report.
The starting point to effective professional judgment begins with
identifying and defining the issue.
The auditor's best defense when material misstatements are not uncovered is to have conducted the audit
in accordance with generally accepted auditing standards.
The classification balance-related audit objective
involves determining if items included on a client's listing are included in the correct general leger accounts.
Which of the following is not one of the steps used to develop audit objectives?
know the proper type of audit opinion to issue
The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to
management.
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected.
material to the financial statements
When the auditor identifies or suspects noncompliance with laws and regulations, the auditor
may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.
A questioning mindset
means the auditor should approach the audit with a "trust but verify" mental outlook.
Auditing standards make ________ distinction(s) between the auditor's responsibilities for searching for errors and fraud.
no
The concept of reasonable assurance indicates that the auditor is
not a guarantor of the correctness of the financial statements.
When an auditor believes that an illegal act may have occurred, the auditor should first
obtain an understanding of the nature and circumstances of the act
Auditors have found that generally the most efficient and effective way to conduct audits is to
obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.
The provisions of many laws and regulations affect the financial statements
only indirectly.
When the auditor considers whether he understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he is performing which step in the professional judgment process?
performing the analysis and identifying potential alternatives
An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should
plan and perform the engagement with an attitude of professional skepticism.
Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective.
presentation and disclosure
With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance.
presentation and disclosure
Balance-related audit objectives
provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances.
An auditor has a duty to
provide reasonable assurance that material misstatements will be detected.
Auditors accumulate evidence to
reach a conclusion about the fairness of the financial statements.
Which of the following management assertions is not associated with classes of transactions and events?
rights and obligations
When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor
should inquire of management about whether the entity is in compliance with such laws and regulations.
Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n)
test of details of balances.
The procedures used to test the effectiveness of the internal controls are known as
tests of controls.
In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of
the Securities Exchange Act of 1934.
When reporting identified or suspected noncompliance,
the auditor should communicate all material noncompliance matters to those charged with governance.
After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on
the auditor's professional judgment.
The objective of an audit of the financial statements is an expression of an opinion on
the fairness of the financial statements in all material respects.
In evaluating these considerations
the first is more important than the second.
The cycle approach to auditing
ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.
The detail tie-in is part of the ________ assertion for account balances.
valuation and allocation
If there is collusion among management, the chance a normal audit would uncover such acts is
very low.
Which of the following would most likely be deemed a direct effect illegal act?
violation of federal income tax laws
In testing for cutoff, the objective is to determine
whether transactions are recorded in the correct accounting period.
