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ACG 5627 > Chapter 6: Audit Responsibilities and Objectives > Flashcards

Chapter 6: Audit Responsibilities and Objectives Flashcards

1
Q

The objective of an audit of the financial statements is an expression of an opinion on

A) the fairness of the financial statements in all material respects.

B) the accuracy of the financial statements.

C) the accuracy of the annual report.

D) the accuracy of the balance sheet and income statement.

A

A) the fairness of the financial statements in all material respects.

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2
Q

If the auditor believes that the financial statements are notfairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor

A) should withdraw from the engagement.

B) should request an increase in audit fees so that more resources can be used to conduct the audit.

C) has the responsibility of notifying financial statement users through the auditor’s report.

D) should notify regulators of the circumstances.

A

C) has the responsibility of notifying financial statement users through the auditor’s report.

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3
Q

Auditors accumulate evidence to

A) defend themselves in the event of a lawsuit.

B) determine if the financial statements are correct.

C) satisfy the requirements of the Securities Acts of 1933 and 1934.

D) reach a conclusion about the fairness of the financial statements.

A

D) reach a conclusion about the fairness of the financial statements.

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4
Q

Which of the following is notone of the steps used to develop audit objectives?

A) know the proper type of audit opinion to issue

B) divide the financial statements into cycles

C) know the management assertions about the financial statements

D) know the specific audit objectives for classes of transactions

A

A) know the proper type of audit opinion to issue

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5
Q

When developing the audit objectives, the first step is to divide the financial statements into cycles.

TRUE OR FALSE

A

FALSE

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6
Q

The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the

A) board of directors.

B) company management.

C) financial statement auditor.

D) company’s internal audit department.

A

B) company management.

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7
Q

In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of

A) GAAP.

B) the Sarbanes-Oxley Act.

C) the Securities Exchange Act of 1934.

D) GAAS.

A

C) the Securities Exchange Act of 1934.

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8
Q

Which of the following statements is true of a public company’s financial statements?

A) Sarbanes-Oxley requires only the CEO to certify the financial statements.

B) Sarbanes-Oxley requires only the CFO to certify the financial statements.

C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.

D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements.

A

C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements.

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9
Q

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to

A) the auditor.

B) management.

C) both management and the auditor equally.

D) management for the statements and the auditor for the notes.

A

B) management.

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10
Q

Because they operate the business on a daily basis, a company’s management knows more about the company’s transactions and related assets, liabilities, and equity than the auditors.

TRUE OR FALSE

A

TRUE

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11
Q

The annual reports of many public companies include a statement about management’s responsibilities and relationship with the CPA firm.

TRUE OR FALSE

A

TRUE

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12
Q

The auditors determine which disclosures must be presented in the financial statements.

TRUE OR FALSE

A

FALSE

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13
Q

The Sarbanes-Oxley Act provides for criminal penalties.

TRUE OR FALSE

A

TRUE

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14
Q

The auditor’s best defense when material misstatements are notuncovered is to have conducted the audit

A) in accordance with generally accepted auditing standards.

B) as effectively as reasonably possible.

C) in a timely manner.

D) only after an adequate investigation of the management team.

A

A) in accordance with generally accepted auditing standards.

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15
Q

Which of the following is notone of the reasons that auditors provide only reasonableassurance on the financial statements?

A) The auditor commonly examines a sample, rather than the entire population of transactions.

B) Accounting presentations contain complex estimates which involve uncertainty.

C) Fraudulently prepared financial statements are often difficult to detect.

D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

A

D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

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16
Q

Which of the following statements is the most correct regarding errors and fraud?

A) An error is unintentional, whereas fraud is intentional.

B) Frauds occur more often than errors in financial statements.

C) Errors are always fraud and frauds are always errors.

D) Auditors have more responsibility for finding fraud than errors.

A

A) An error is unintentional, whereas fraud is intentional.

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17
Q

When an auditor believes that an illegal act may have occurred, the auditor should first

A) obtain an understanding of the nature and circumstances of the act.

B) consult with legal counsel or others knowledgeable about the illegal act.

C) discuss the matter with the audit committee.

D) withdraw from the engagement.

A

A) obtain an understanding of the nature and circumstances of the act.

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18
Q

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not________ are detected.

A) important to the financial statements

B) statistically significant to the financial statements

C) material to the financial statements

D) identified by the client

A

C) material to the financial statements

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19
Q

Fraudulent financial reporting is most likely to be committed by whom?

A) line employees of the company

B) outside members of the company’s board of directors

C) company management

D) the company’s auditors

A

C) company management

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20
Q

Which of the following would most likely be deemed a direct effect illegal act?

A) violation of federal employment laws

B) violation of federal environmental regulations

C) violation of federal income tax laws

D) violation of civil rights laws

A

C) violation of federal income tax laws

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21
Q

The concept of reasonable assurance indicates that the auditor is

A) not a guarantor of the correctness of the financial statements.

B) not responsible for the fairness of the financial statements.

C) responsible only for issuing an opinion on the financial statements.

D) responsible for finding all misstatements.

A

A) not a guarantor of the correctness of the financial statements.

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22
Q

Which of the following is the auditor least likely to do when aware of an illegal act?

A) discuss the matter with the client’s legal counsel

B) obtain evidence about the potential effect of the illegal act on the financial statements

C) contact the local law enforcement officials regarding potential criminal wrongdoing

D) consider the impact of the illegal act on the relationship with the company’s management

A

C) contact the local law enforcement officials regarding potential criminal wrongdoing

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23
Q

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

A) employee fraud.

B) an error.

C) misappropriation of assets.

D) a defalcation.

A

B) an error.

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24
Q

An auditor has a duty to

A) provide reasonable assurance that material misstatements will be detected.

B) be a guarantor of the fairness in the statements.

C) be equally responsible with management for the preparation of the financial statements.

D) be an insurer of the fairness in the statements.

A

A) provide reasonable assurance that material misstatements will be detected.

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25
Q

If the auditor were responsible for making certain that all of management’s assertions in the financial statements were absolutely correct,

A) bankruptcies could no longer occur.

B) bankruptcies would be reduced to a very small number.

C) audits would be much easier to complete.

D) audits would not be economically practical.

A

D) audits would not be economically practical.

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26
Q

When dealing with laws and regulations that do nothave a direct effect on the financial statements, the auditor

A) should inquire of management about whether the entity is in compliance with such laws and regulations.

B) has no responsibility to determine if any violations of these laws has occurred.

C) must report all violations, including inconsequential violations, to the audit committee.

D) should perform the same procedures as for violations having a direct effect on the financial statements.

A

A) should inquire of management about whether the entity is in compliance with such laws and regulations.

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27
Q

Which of the following statements is usually true?

A) Materiality is easy to quantify.

B) Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion among management.

C) Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement.

D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

A

D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements.

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28
Q

Auditing standards make ________ distinction(s) between the auditor’s responsibilities for searching for errors and fraud.

A) little

B) a significant

C) no

D) various

A

C) no

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29
Q

In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is

A) greater for management fraud because managers are inherently more deceptive than employees.

B) greater for management fraud because of management’s ability to override existing internal controls.

C) greater for employee fraud because of the higher crime rate among blue collar workers.

D) greater for employee fraud because of the larger number of employees in the organization.

A

B) greater for management fraud because of management’s ability to override existing internal controls.

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30
Q

Misappropriation of assets

A) is generally committed by company management.

B) harms the users of the financial statements by providing them incorrect financial data for their decision making.

C) causes harm to stockholders because the assets are no longer available to their rightful owners.

D) causes the financial statements to be misstated since the misappropriation usually involves material amounts.

A

C) causes harm to stockholders because the assets are no longer available to their rightful owners.

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31
Q

When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility

A) more on discovering errors than employee fraud.

B) more on discovering employee fraud than errors.

C) equally on discovering errors and employee fraud.

D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.

A

C) equally on discovering errors and employee fraud.

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32
Q

If there is collusion among management, the chance a normal audit would uncover such acts is

A) very low.

B) very high.

C) zero.

D) none of the above.

A

A) very low.

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33
Q

When the auditor becomes aware of or suspects noncompliance with laws and regulations

A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit.

B) the auditor should discuss the matter with management at a level above those suspected of the noncompliance.

C) the auditor should obtain additional information to evaluate the possible effects on the financial statements.

D) all of the above

A

D) all of the above

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34
Q

When the auditor identifies or suspects noncompliance with laws and regulations, the auditor

A) should discuss the matter with those whom they believe committed the illegal act.

B) begin communication with the FASB in accordance with PCAOB regulations.

C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.

D) should withdraw from the engagement.

A

C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence.

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35
Q

When an auditor knows that an illegal act has occurred, she must

A) report it to the proper governmental authorities.

B) consider the effects on the financial statements, including the adequacy of disclosure.

C) withdraw from the engagement.

D) issue an adverse opinion.

A

B) consider the effects on the financial statements, including the adequacy of disclosure.

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36
Q

Which of the following is an accurate statement concerning the auditor’s responsibility to consider laws and regulations?

A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements.

B) The auditor’s responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.

C) It is the responsibility of the auditor to determine if an act constitutes noncompliance.

D) The auditor must inform an outside party if management has knowingly not complied with a law or regulation.

A

B) The auditor’s responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.

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37
Q

Which of the following statements best describes the auditor’s responsibility with respect to illegal acts that do nothave a material effect on the client’s financial statements?

A) Generally, the auditor is under no obligation to notify parties other than personnel within the client’s organization.

B) Generally, the auditor is under an obligation to inform the PCAOB.

C) Generally, the auditor is obligated to disclose the relevant facts in the auditor’s report.

D) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

A

A) Generally, the auditor is under no obligation to notify parties other than personnel within the client’s organization.

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38
Q

Which of the following statements best describes the auditor’s responsibility regarding the detection of fraud?

A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.

B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.

C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets.

D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

A

B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.

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39
Q

When reporting identified or suspected noncompliance,

A) the auditor must report inconsequential noncompliance to the audit committee.

B) the auditor should communicate all material noncompliance matters to those charged with governance.

C) any intentional noncompliance must be reported to local law enforcement.

D) all noncompliance, whether material or not, must result in a disclaimer of opinion.

A

B) the auditor should communicate all material noncompliance matters to those charged with governance.

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40
Q

Another term for misappropriation of assets is

A) management fraud.

B) collusion.

C) employee fraud.

D) illegal acts.

A

C) employee fraud.

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41
Q

The provisions of many laws and regulations affect the financial statements

A) directly.

B) only indirectly.

C) both directly and indirectly.

D) materially if direct; immaterially if indirect.

A

B) only indirectly.

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42
Q

If a client has violated federal tax laws,

A) the auditor must notify the IRS.

B) and the amount is significant, the auditor should communicate with those charged with governance.

C) the noncompliance generally will not impact the financial statements.

D) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.

A

B) and the amount is significant, the auditor should communicate with those charged with governance.

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43
Q

Errors are usually more difficult for an auditor to detect than frauds.

TRUE OR FALSE

A

FALSE

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44
Q

Other than inquiring of management about policies they have established to prevent illegal acts and whether management knows of any laws or regulations that the company has violated, the auditor should not search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they may exist.

TRUE OR FALSE

A

TRUE

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45
Q

When an auditor believes that an illegal act may have occurred, the first step he or she should take is to gather additional evidence to determine the extent of the illegality and if there is a direct impact on the financial statements.

TRUE OR FALSE

A

TRUE

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46
Q

Audits are expected to provide a higher degree of assurance for the detection of material frauds than is provided for an equally material error.

TRUE OR FALSE

A

FALSE

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47
Q

Auditors have a higher degree of responsibility for detecting illegal acts that have a direct effect on the financial statements than illegal acts that do not have a direct effect on the financial statements.

TRUE OR FALSE

A

TRUE

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48
Q

The auditor’s first course of action when an illegal act is uncovered should be to immediately notify the appropriate authorities, including but not limited to, law enforcement and the Securities and Exchange Commission.

TRUE OR FALSE

A

FALSE

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49
Q

An audit generally provides no assurance that illegal acts that do not have a direct effect on the financial statements will be detected.

TRUE OR FALSE

A

TRUE

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50
Q

Auditing standards indicate that reasonable assurance is a moderate, but not absolute, level of assurance that the financial statements are free of material misstatement.

TRUE OR FALSE

A

FALSE

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51
Q

In obtaining reasonable assurance that the financial statements are free of material misstatement, the auditor does notneed to take into account the applicable legal and regulatory framework relevant to the client.

TRUE OR FALSE

A

FALSE

In obtaining reasonable assurance that the financial statements are free of material misstatement, the auditor takes into account applicable legal and regulatory frame- works relevant to the client.

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52
Q

The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company’s financial position and results of operations.

TRUE OR FALSE

A

FALSE

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53
Q

As the impact from noncompliance is further removed from affecting the financial statements, the less likely the auditor is to become aware of or recognize noncompliance when auditing the financial statements.

TRUE OR FALSE

A

TRUE

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54
Q

An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and

A) the assumption that upper-level management is dishonest.

B) a critical assessment of the audit evidence.

C) the assumption that all employees are motivated by greed.

D) verification of all critical information by independent third parties.

A

B) a critical assessment of the audit evidence.

55
Q

Which of the following is an accurate statement about professional skepticism?

A) Professional skepticism involves a critical assessment of the evidence.

B) Professional skepticism is easy to implement in practice.

C) It is easy for auditors to understand that their clients may try to deceive them throughout the audit process.

D) Professional skepticism is only necessary for the audits of public companies.

A

A) Professional skepticism involves a critical assessment of the evidence.

56
Q

One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others.

A) interpersonal understanding

B) autonomy

C) suspension of judgment

D) self-esteem

A

B) autonomy

57
Q

A questioning mindset

A) means the auditor must prove every statement that management makes to them.

B) means the auditor should approach the audit with a “do not trust anyone” mental outlook.

C) assures that the auditor will only accept honest clients.

D) means the auditor should approach the audit with a “trust but verify” mental outlook.

A

D) means the auditor should approach the audit with a “trust but verify” mental outlook.

58
Q

One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious.

A) self-esteem

B) an interpersonal understanding

C) a search for knowledge

D) a questioning mindset

A

C) a search for knowledge

59
Q

________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions.

A) Self-esteem

B) Interpersonal understanding

C) Suspension of judgment

D) Autonomy

A

A) Self-esteem

60
Q

An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should

A) plan and perform the engagement with an attitude of professional skepticism.

B) not rely on internal controls that are designed to prevent or detect errors or fraud.

C) design audit tests to detect unrecorded transactions.

D) extend the work to audit the majority of the recorded transactions and records of an entity.

A

A) plan and perform the engagement with an attitude of professional skepticism.

61
Q

Auditors often convince themselves that they only accept clients they can trust and who have high integrity.

TRUE OR FALSE

A

TRUE

62
Q

A suspension of judgment is the recognition that people’s motivations and perceptions can lead them to provide biased or misleading information.

TRUE OR FALSE

A

FALSE

63
Q

The starting point to effective professional judgment begins with

A) gathering the facts.

B) identifying alternatives.

C) identifying relevant literature.

D) identifying and defining the issue.

A

D) identifying and defining the issue.

64
Q

Which of the following is nota step in the professional judgment process?

A) make the decision

B) perform the analysis

C) determine the type of audit opinion

D) review and document the rationale for the conclusion

A

C) determine the type of audit opinion

65
Q

________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value.

A) Anchoring

B) Availability

C) Overconfidence

D) Confirmation

A

A) Anchoring

66
Q

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?

A) identifying and defining the issue

B) performing the analysis and identifying potential alternatives

C) making the decision

D) gathering the facts

A

B) performing the analysis and identifying potential alternatives

67
Q

When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will

A) consider the accounting and auditing standards relevant to the issues.

B) articulate in written form the rationale of their judgment.

C) identify the issue.

D) gather the facts.

A

B) articulate in written form the rationale of their judgment.

68
Q

The profession has developed professional judgment frameworks that illustrate an effective decision-making process.

TRUE OR FALSE

A

TRUE

69
Q

During the professional judgment process, the analysis may identify only one appropriate response to the issue.

TRUE OR FALSE

A

FALSE

70
Q

Overconfidence is the tendency to put more weight on information that is consistent with the initial beliefs or preferences.

TRUE OR FALSE

A

FALSE

71
Q

In order to mitigate availability, the auditor should consult with others and make the opposing case.

TRUE OR FALSE

A

TRUE

72
Q

Why does the auditor divide the financial statements into smaller segments?

A) Using the cycle approach makes the audit more manageable.

B) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces.

C) The cycle approach is used because auditing standards require it.

D) All of the above are correct.

A

A) Using the cycle approach makes the audit more manageable.

73
Q

Why does the auditor divide the financial statements into segments around the financial statement cycles?

A) Most auditors are trained to audit cycles as opposed to entire financial statements.

B) The approach aids in the assignment of tasks to different members of the audit team.

C) The cycle approach is required by auditing standards.

D) The cycle approach allows the auditor to detect illegal acts.

A

B) The approach aids in the assignment of tasks to different members of the audit team.

74
Q

The most important general ledger account included in and affecting several cycles is the

A) cash account.

B) inventory account.

C) income tax expense and liability accounts.

D) retained earnings account.

A

A) cash account.

75
Q

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

A) the transactions are related to financing a company rather than to its operations.

B) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively.

C) Both A and B are correct.

D) Neither A nor B is correct.

A

C) Both A and B are correct.

76
Q

In describing the cycle approach to segmenting an audit, which of the following statements is nottrue?

A) All general ledger accounts and journals are included at least once.

B) Some journals and general ledger accounts are included in more than one cycle.

C) The “capital acquisition and repayment” cycle is closely related to the “acquisition of goods and services and payment” cycle.

D) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

A

D) The “inventory and warehousing” cycle may be audited at any time during the engagement since it is unrelated to the other cycles.

77
Q

The cycle approach to auditing

A) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.

B) cannot combine transactions recorded in different journals with the general ledger balances that result from those transactions.

C) is the only way of segmenting an audit.

D) assumes that each account has two or more cycles associated with it.

A

A) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements.

78
Q

Which balance sheet accounts are included in the payroll and personnel cycle?

A) cash in bank, accrued payroll, trade accounts receivable

B) accrued payroll, notes payable, and deferred tax

C) accrued payroll, cash in bank, and accrued payroll taxes

D) salaries and commissions, cash in bank, accrued payroll taxes

A

C) accrued payroll, cash in bank, and accrued payroll taxes

79
Q

Under the cycle approach to segmenting an audit, transactions recorded in different journals should never be combined with the general ledger balances that result from those transactions.

TRUE OR FALSE

A

FALSE

80
Q

Under the cycle approach, the only accounts that have two or more cycles associated with them are cash and accounts receivable.

TRUE OR FALSE

A

FALSE

81
Q

Although auditors need to consider the interrelationships between cycles, they typically treat cycles independently to the extent practical to manage complex audits effectively.

TRUE OR FALSE

A

TRUE

82
Q

When examining the relationships of the five cycles and general cash, the cycles have no beginning or end except at the origin or final disposition of the company.

TRUE OR FALSE

A

TRUE

83
Q

Auditors have found that generally the most efficient and effective way to conduct audits is to

A) obtain complete assurance about the correctness of each class of transactions affecting the account.

B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.

C) obtain assurance about the ending balance of the account only.

D) verify each entry that was made into an account.

A

B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.

84
Q

The term audit objective refers to all of the following exceptfor

A) transaction-related audit objectives.

B) presentation and disclosure-related audit objectives.

C) balance-related audit objectives.

D) cycle-related audit objectives.

A

D) cycle-related audit objectives.

85
Q

When an auditor is determining what information to include in the notes to the financial statements relating to bonds payable, he is concerned with the transaction-related audit objectives.

TRUE OR FALSE

A

FALSE

86
Q

It is generally impractical for the auditor to obtain complete assurance about the correctness of each class of transactions.

TRUE OR FALSE

A

TRUE

87
Q

Which of the following is notone of the AICPA categories of assertions?

A) assertions about classes of transactions and events for the period under audit

B) assertions about financial statements and correspondence to GAAP

C) assertions about account balances at period end

D) assertions about presentation and disclosure

A

B) assertions about financial statements and correspondence to GAAP

88
Q

If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the

A) completeness assertion.

B) existence assertion.

C) cutoff assertion.

D) classification assertion.

A

D) classification assertion.

89
Q

International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is nota category of assertions that management makes about the accounting information in financial statements?

A) assertions about classes of transactions for the period under audit

B) assertions about account balances at period end

C) assertions about the quality of source documents used to prepare the financial statements

D) assertions about presentation and disclosure

A

C) assertions about the quality of source documents used to prepare the financial statements

90
Q

Management assertions are

A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.

B) stated in the footnotes to the financial statements.

C) explicitly expressed representations about the financial statements.

D) provided to the auditor in the assertions letter, but are not disclosed on the financial statements.

A

A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS.

91
Q

Management makes the following assertions about account balances:

A) existence, completeness, classification and cutoff.

B) existence, accuracy, classification and rights and obligations.

C) existence, completeness, valuation and allocation, and rights and obligations.

D) existence, completeness, rights and obligations, and cutoff.

A

C) existence, completeness, valuation and allocation, and rights and obligations.

92
Q

Management’s disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion.

A) completeness

B) existence

C) accuracy and valuation

D) rights and obligations

A

C) accuracy and valuation

93
Q

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”?

A) occurrence

B) completeness

C) rights and obligations

D) existence

A

B) completeness

94
Q

Which of the following management assertions is notassociated with classes of transactions and events?

A) occurrence

B) classification

C) accuracy

D) rights and obligations

A

D) rights and obligations

95
Q

With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance.

A) existence

B) account balances

C) presentation and disclosure

D) classes of transactions

A

C) presentation and disclosure

96
Q

Relevant assertions have a meaningful bearing on whether the account is fairly stated and are used to assess the risk of material misstatement and the design and performance of audit procedures.

TRUE OR FALSE

A

TRUE

97
Q

The auditor’s audit objectives follow and are closely related to management assertions.

TRUE OR FALSE

A

TRUE

98
Q

Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions?

A) The specific audit objectives are applicable to every class of transactions.

B) The general audit objectives are applicable to every class of transactions.

C) Once the specific transaction-related audit objectives are established, they can be used to develop the general transaction-related objectives.

D) For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded.

A

B) The general audit objectives are applicable to every class of transactions.

99
Q

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?

A) existence

B) completeness

C) accuracy

D) cut-off

A

C) accuracy

100
Q

The posting and summarization audit objective is the auditor’s counterpart to management’s assertion of

A) occurrence.

B) completeness.

C) accuracy.

D) classification.

A

C) accuracy.

101
Q

________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions).

A) Occurrence; completeness

B) Completeness; occurrence

C) Accuracy; classification

D) Classification; accuracy

A

A) Occurrence; completeness

102
Q

General transaction-related audit objectives vary from audit to audit, depending on the nature and characteristics of the client’s business and industry.

TRUE OR FALSE

A

FALSE

103
Q

The audit objective of posting and summarization is associated with the management assertion of accuracy.

TRUE OR FALSE

A

TRUE

104
Q

The transaction-related audit objective of timing is related to the assertion of cutoff.

TRUE OR FALSE

A

TRUE

105
Q

If a sale was for a valid shipment, but the amount of the sales invoice was calculated incorrectly, the accuracy objective was violated.

TRUE OR FALSE

A

TRUE

106
Q

The effect of a violation of the completeness transaction-related audit objective for cash disbursements transactions would be an overstatement of cash disbursements.

TRUE OR FALSE

A

FALSE

107
Q

The transaction-related audit objective that deals with whether recorded transactions have actually occurred is the completeness objective.

TRUE OR FALSE

A

FALSE

108
Q

In testing for cutoff, the objective is to determine

A) whether all of the current period’s transactions are recorded.

B) whether transactions are recorded in the correct accounting period.

C) the proper cutoff between capitalizing and expensing expenditures.

D) the proper cutoff between disclosing items in footnotes or in account balances.

A

B) whether transactions are recorded in the correct accounting period.

109
Q

The detail tie-in objective is notconcerned that the details in the account balance

A) agree with related subsidiary ledger amounts.

B) are properly disclosed in accordance with GAAP.

C) foot to the total in the account balance.

D) agree with the total in the general ledger.

A

B) are properly disclosed in accordance with GAAP.

110
Q

The detail tie-in is part of the ________ assertion for account balances.

A) classification

B) valuation and allocation

C) rights and obligations

D) completeness

A

B) valuation and allocation

111
Q

The classification balance-related audit objective

A) involves determining if items included on a client’s listing are included in the correct general leger accounts.

B) is the counterpart to the management assertion of completeness.

C) involves determining if items included on a client’s listing are disclosed properly in the financial statements.

D) involves tying in the account balances to the general ledger.

A

A) involves determining if items included on a client’s listing are included in the correct general leger accounts.

112
Q

Balance-related audit objectives

A) are never applied to income statement accounts.

B) are designed to detect fraud.

C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances.

D) can have only one specific-related audit objectives.

A

C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances.

113
Q

Which of the following statements is nottrue?

A) Balance-related audit objectives are applied to ending account balances.

B) Transaction-related audit objectives are applied to classes of transactions.

C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts.

D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

A

D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

114
Q

Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective.

A) occurrence

B) completeness

C) presentation and disclosure

D) classification and understandability

A

C) presentation and disclosure

115
Q

Balance-related audit objectives follow from management assertions.

TRUE OR FALSE

A

TRUE

116
Q

Balance-related audit objectives are usually applied to the ending balance in income statement accounts; transaction-related audit objectives are usually applied to transactions reflected in balance sheet accounts.

TRUE OR FALSE

A

FALSE

117
Q

Tests of details of balances typically involve the use of comparisons and relationships to assess the overall reasonableness of account balances.

TRUE OR FALSE

A

FALSE

118
Q

The general balance-related audit objective that deals with determining that details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total in the general ledger is the detail tie-in objective.

TRUE OR FALSE

A

TRUE

119
Q

The cutoff objective, “transactions near the balance sheet date are recorded in the proper period,” is a balance-related audit objective.

TRUE OR FALSE

A

TRUE

120
Q

The presentation and disclosure-related audit objectives are identical to the management assertions for presentation and disclosure.

TRUE OR FALSE

A

TRUE

121
Q

The procedures used to test the effectiveness of the internal controls are known as

A) tests of transactions.

B) tests of controls.

C) substantive analytical procedures.

D) control risk.

A

B) tests of controls.

122
Q

Which of the following statements is notcorrect?

A) There are many ways an auditor can accumulate evidence to meet overall audit objectives.

B) Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.

C) It is appropriate to minimize the cost of accumulating evidence.

D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

A

D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

123
Q

Two overriding considerations affect the many ways an auditor can accumulate evidence:

  1. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility.
  2. Cost of accumulating evidence should be minimized.

In evaluating these considerations

A) the first is more important than the second.

B) the second is more important than the first.

C) they are equally important.

D) it is impossible to prioritize them.

A

A) the first is more important than the second.

124
Q

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

A) can issue an unqualified opinion.

B) can significantly reduce other substantive tests.

C) can write the engagement letter.

D) needs to perform additional tests of controls so that the assurance level can be increased.

A

B) can significantly reduce other substantive tests.

125
Q

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

A) generally accepted auditing standards.

B) the AICPA’s Code of Professional Conduct.

C) generally accepted accounting principles.

D) the auditor’s professional judgment.

A

D) the auditor’s professional judgment.

126
Q

Direct, written communication with the client’s customers to identify whether a receivable exists is an example of a(n)

A) substantive test of transactions.

B) test of controls.

C) analytical procedure.

D) test of details of balances.

A

D) test of details of balances.

127
Q

________ are used as evidence to provide assurance about an account balance.

A) Substantive analytical procedures

B) Tests of transactions

C) Audit risks

D) Tests of details of balances

A

A) Substantive analytical procedures

128
Q

List the four phases of a financial statement audit.

A
  1. plan and design an audit approach based on risk assessment procedures
  2. perform tests of controls and substantive tests of transactions
  3. perform substantive analytical procedures and tests of details of balances
  4. complete the audit and issue an audit report
129
Q

When an auditor has reduced assessed control risk based on tests of controls, he or she may then reduce the extent to which the accuracy of the financial statement information directly related to those controls must be supported through the accumulation of evidence using substantive tests.

TRUE OR FALSE

A

TRUE

130
Q

For a private company audit, tests of controls are normally performed only on those internal controls the auditor believes have notbeen operating effectively during the period under audit.

TRUE OR FALSE

A

FALSE

131
Q

Rights and obligations is the only balance-related assertion without a similar transaction-related assertion.

TRUE OR FALSE

A

TRUE

132
Q

The audit objectives are the well-defined methodology for organizing an audit to ensure that the evidence gathered is sufficient and appropriate.

TRUE OR FALSE

A

FALSE

133
Q

Obtaining an understanding of the entity and its environment is part of the analytical procedures phase of the audit.

TRUE OR FALSE

A

FALSE

134
Q

An auditor assesses the risk of material misstatement to determine the impact on the audit plan and to determine the nature, extent, and timing of the audit procedures.

TRUE OR FALSE

A

TRUE

ACG 5627 (14 decks)

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