Ch 5 - Quiz Flashcards
Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
A.) When the combined assessed level of inherent and control risk over the sale is moderate.
B.) When the assessed level of control risk over the sale is low.
C.) When the combined assessed level of inherent and control risk over the sale is high.
D.) When the assessed level of detection risk over the sale is high.
C.) When the combined assessed level of inherent and control risk over the sale is high.
The auditor would be more likely to confirm certain relevant contract terms as the risk of material misstatement increases. In this case, the risk of material misstatement is said to be “high,” which is consistent with the need to perform additional procedures to address revenue-recognition issues.
Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor’s competence?
A.) Whether policies prohibit the internal auditor from auditing areas where relatives are employed.
B.) The reporting status of the internal auditor within the organization.
C.) Whether the board of directors, audit committee, or owner-manager oversees employment decisions related to the internal auditor.
D.) The educational level and professional experiences of the internal auditor.
D.) The educational level and professional experiences of the internal auditor.
In evaluating the internal auditors’ competence, the auditor should obtain (or update) information about: educational level and professional experience; professional certification and continuing education; policies related to assignment of internal auditors; policies related to supervision and review; quality of work products; and performance evaluations.
Which of the following is a management assertion regarding account balances at the period end?
A.) Transactions and events have been recorded in the proper accounts.
B.) Amounts and other data related to transactions and events have been recorded appropriately.
C.) The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
D.) Transactions and events that have been recorded have occurred and pertain to the entity.
C.) The entity holds or controls the rights to assets, and liabilities are obligations of the entity.
There are 4 assertions applicable to account balances at the period end: (1) existence; (2) completeness; (3) rights or obligations; and (4) valuation and allocation.
Which of the following statements concerning evidential matter is correct?
A.) Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.
B.) A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
C.) An effective internal control structure contributes little to the reliability of the evidence created within the entity.
D.) The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.
B.) A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
While the accounting records - including the general and subsidiary ledgers, the journals, and supporting worksheets - are considered to constitute evidence in support of the financial statements, accounting data, by itself, cannot be considered sufficient support for the financial statements. The auditor must test the accounting data in order to develop persuasive evidence to support the opinion.
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:
A.) Determine that the accounts selected for interim testing are not material to the financial statements taken as a whole.
B.) Assess control risk at below the maximum for the assertions embodied in the accounts selected for interim testing.
C.) Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
D.) Obtain written representations from management that all financial records and related data will be made available.
C.) Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
The auditor’s objective is to issue an opinion on the financial statements at the balance sheet date. The performance of substantive tests prior to the balance sheet date increases the risk that misstatements may occur at the balance sheet date that the auditor will not detect. As a result, the auditor must consider certain factors carefully before electing to perform such tests. The performance of substantive analytical procedures to address the roll-forward activity between the interim date and the year-end date would specifically consider whether the amounts of the year-end balances are reasonably predictable with respect to amount, significance, and composition.
Which of the following factors most likely would affect an auditor’s judgment about the quantity, type, and content of the auditor’s documentation?
A.) The likelihood of a review by a concurring (second) partner.
B.) The number of personnel assigned to the audit.
C.) The assessed level of control risk.
D.) The content of the management representation letter.
C.) The assessed level of control risk.
As the assessed level of control risk increases (decreases), the acceptable level of detection risk decreases (increases) and the nature, timing, and extent of the audit work performed and the related documentation are altered.
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would be least likely to consider information obtained from
A.) The results of analytical procedures.
B.) Previous experience with the internal auditor.
C.) External quality reviews of the internal auditor’s activities.
D.) Discussions with management personnel.
A.) The results of analytical procedures.
Analytical procedures are performed to aid in the detection of unusual transactions, as substantive procedures, and to aid in the overall review of the financial statements. The results of such procedures would not provide evidence which would aid the independent auditor in assessing the competence and objectivity of the internal auditors.
Which of the following types of audit evidence is the most persuasive?
A.) Prenumbered client purchase order forms.
B.) Client work sheets supporting cost allocations.
C.) Client representation letter.
D.) Bank statements obtained from the client.
D.) Bank statements obtained from the client.
Greater reliability (and thus, persuasiveness) is achieved from evidence obtained from sources outside the entity, even when that evidence is obtained from the client.
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?
A.) The recipients are likely to sign the confirmations without devoting proper attention to them.
B.) Analytical procedures indicate that few exceptions are expected.
C.) Subsequent cash receipts are unusually difficult to verify.
D.) The combined assessed level of inherent risk and control risk is low.
A.) The recipients are likely to sign the confirmations without devoting proper attention to them.
Using the blank form of confirmation of accounts receivable provides greater assurance that the recipient of the confirmation has verified that the information is correct. It is more likely to be used when the auditor is concerned that recipients will not devote proper attention to the confirmations.
An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?
A.) Resend confirmations for any significant customer balances remaining at year-end.
B.) Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.
C.) Review cash collections subsequent to the interim date and the year-end.
D.) Send confirmations for all new customer balances incurred from the interim date to year-end.
B.) Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.
This answer is correct because an auditor will review significant changes in balances.
Which of the following is the best example of a substantive procedure?
A.) Flowcharting of the client’s cash receipts system.
B.) Confirmation of balances of accounts receivable.
C.) Comparison of signatures on checks to a list of authorized signers.
D.) Examining a sample of cash disbursements to test whether expenses have been properly approved.
B.) Confirmation of balances of accounts receivable.
Confirmation of balances of accounts receivable will provide a test of the ending account balance and is therefore a detailed test of a balance, a type of substantive procedure.
The current file of an auditor’s working papers most likely would include a copy of the
A.) Articles of incorporation.
B.) Flowchart of the internal control procedures.
C.) Bank reconciliation.
D.) Pension plan contract.
C.) Bank reconciliation.
This answer is correct because the current file will include items of particular significance to the current year’s audit, such as bank reconciliations.
Which of the following procedures would yield the most reliable evidence?
A.) A scanning of trial balances.
B.) An inquiry of client personnel.
C.) A comparison of beginning and ending retained earnings.
D.) A recalculation of bad debt expense.
D.) A recalculation of bad debt expense.
This answer is correct because recomputation of amounts represents highly reliable evidence.
Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
A.) Inventory is properly presented in the financial statements.
B.) Inventory is properly valued.
C.) Inventory is complete.
D.) The entity has rights to the inventory.
C.) Inventory is complete.
This is correct because the completeness assertion most directly relates to whether “all” of an item is reflected.
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about the
A.) Valuation of related-party transactions.
B.) Valuation of intangible assets.
C.) Existence of contingencies.
D.) Existence of fixed asset additions.
D.) Existence of fixed asset additions.
The requirement is to identify the circumstance in which an internal auditor’s work would most likely affect the nature, timing, and extent of a CPA’s auditing procedures. When considering the effect of the internal auditors’ work, the CPA considers (1) the materiality of financial statement amounts, (2) the risk of material misstatement of the assertions, and (3) the degree of subjectivity involved in the evaluation of the audit evidence. Answer (c) is correct because the existence of fixed asset additions involves little subjectivity. Answers (a) and (b) are incorrect because the existence of contingencies and the valuation of intangible assets are subjective and the risk of misstatement may be high. Answer (d) is incorrect because the valuation of related-party transactions may be very subjective due to the lack of an “arm’s-length” transaction.
