Chapter 8 [Salosagcol] Flashcards by Stussy Aubrey

Which of the following statements is most correct regarding the primary purpose of audit procedures?
a. To detect all errors or fraudulent activities as well as illegal activities?
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions regarding the client’s financial statements
d. To determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual

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An auditor may achieve audit objectives related to particular assertions by
a. Performing substantive tests
b. Adhering to a system of quality control
c. Preparing audit working papers
d. Increasing the level of detection risk

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In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct tests of financial balances, or analytical procedures
d. Will increase proportionately with the auditor’s reliance on internal control

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The objective of tests of details of transactions performed as substantive tests is to
a. Comply with generally accepted auditing standards
b. Attain assurance about the effectiveness and efficiency of client’s operations
c. Detect material misstatements in the financial statements
d. Evaluate whether internal control policies and procedures operated effectively

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Which of the following is the best example of a substantive test?
a. Examining a sample of cash disbursements to test whether expenses have been properly approved
b. Confirmation of balances of accounts receivable
c. Comparison of signatures on checks to a list of authorized signers
d. Flowcharting of the client’s cash receipts system

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The primary emphasis in most tests of details of balances is on the
a. Statement of financial position accounts
b. Income statement accounts
c. Cash flow statement accounts
d. All of the above

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A procedure designed to test for monetary misstatements directly affecting the validity of the financial statement balances is a:
a. Test of controls
b. Substantive test
c. Test of attributes
d. Monetary-unit sampling test

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Which of the following is ordinarily designed to detect possible material peso errors?
a. Tests of controls
b. Analytical review procedures
c. Computer controls
d. None of the above

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More types of evidence are obtained by using what type of test than any other?
a. Substantive tests of transactions
b. Tests of controls
c. Analytical procedures
d. Tests of details of balances

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The primary difference between an audit of the statement of financial position and an audit of the income statement lies in the fact that the audit of the income statement deals with the verification of
a. Transactions
b. Authorizations
c. Costs
d. Cutoffs

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Which of the following tests commonly occur together?
a. Substantive tests of transactions and tests of controls
b. Substantive tests of transactions and obtaining an understanding of internal controls
c. Analytical procedures and tests of controls
d. All of the above commonly occur together

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As audit evidence, physical examination and confirmation, may only be obtained using which of the following types of tests?
a. Tests of controls
b. Tests of transactions
c. Analytical procedures
d. Tests of details of balances

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An auditor may compensate for a weakness in internal control by increasing the
a. Level of detection risk
b. Extent of tests of controls
c. Preliminary judgement about audit risk
d. Extent of analytical procedures

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Below are five types of tests which auditors use to determine whether financial statements are fairly stated. Which three are substantive tests?
1. Risk assessment procedures
2. Tests of controls
3. Tests of details of transactions
4. Analytical procedures
5. Tests of details of balances

a. 1, 2, and 3
b. 3, 4, and 5
c. 2, 3, and 5
d. 2, 3, and 4

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Which of the following is true?
a. Tests of details of balances focus on the ending balances of accounts
b. Tests of details of balances focus on the transactions during the period
c. Tests of details of balances focus on the auditor’s understanding of internal controls
d. Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the auditor

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For efficiency, tests of controls are done at the same time as
a. Analytical procedures
b. Compliance tests
c. Substantive tests of transactions
d. Substantive tests of balances

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The objective of tests of details of transactions performed as test of control is to
a. Comply with generally accepted auditing standards
b. Attain assurance about the effectiveness and efficiency of client’s operations
c. Detect material misstatements in the financial statements
d. Evaluate whether internal control policies and procedures operated effectively

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In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct tests of financial balances, or analytical tests
d. Will increase proportionally with the auditor’s reliance on internal control

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Evidence is usually more persuasive for statement of financial position accounts when it is obtained
a. As close to the financial statement date as possible
b. Only from transactions occurring on the financial statement date
c. From various times throughout the client’s year
d. From the time period when transactions in that account were most numerous during the fiscal period

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“The use of comparisons and relationships to assess whether account balances or other data appear reasonable compared to the auditor’s expectations” is a definition of
a. Analytical procedures
b. Tests of transactions
c. Tests of balances
d. Tests of controls

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Auditors may use analytical procedures at any time during an audit; however, they are required to be used at certain times. During which phase(s) of the audit is the auditor primarily concerned with using analytical procedures from a cost savings perspective?
a. Planning
b. Testing
c. Completion
d. All of the above

Analytical procedures are not required during testing. Thus, during the testing stage, the auditor is concerned from a cost savings perspective.

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Often, auditor procedures result in significant differences being discovered by the auditor. The auditor should investigate further if
a. Significant differences are not expected but do exist; Significant differences are expected but do not exist
b. Significant differences are not expected but do exist
c. Significant differences are expected but do not exist
d. None of the above

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Analytical procedures are required to be performed during which phase(s) of the audit?
a. Planning; Testing; Completion
b. Planning; Completion
c. Testing
d. Completion

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Auditors may decide to replace tests of details with substantive analytical procedures when possible because the
a. Analytical procedures are more reliable
b. Analytical procedures are considerably less expensive
c. Analytical procedures are more persuasive
d. Tests of details are more difficult to interpret

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Which of the following is correct with respect to the use of analytical procedures? a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption b. Analytical procedures must be used in the testing phase of the audit c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor's attention so that the auditor's understanding of the business is improved d. Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data

Which of the following statements is not correct? a. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively b. For certain immaterial accounts, analytical procedures may be the only evidence needed c. In some instances, other types of evidence may be reduced when analytical procedures indicate than an account balance appears reasonable d. Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures

Which of the following statements concerning analytical procedures is correct? a. Analytical review may be omitted entirely for some financial statement audits b. Analytical procedures used in planning an audit should not use non-financial information c. Analytical procedures are usually effective and efficient for tests of controls d. Analytical procedures alone may provide the appropriate level of assurance for some assertions

D ## Footnote For some assertions, analytical procedures alone may suffice to reduce audit risk to an acceptably low level. For example, the auditor's risk assessment may be supported by audit evidence from tests of controls. Substantive analytical procedures generally are more applicable to large transaction volumes that are predictable over time (AU-C 330). The decision is based on the auditor's professional judgment about the expected effectiveness and efficiency of the available procedures.

Of the following procedures, which does not produce analytical evidence? a. Compare revenue, cost of sales, and gross profit with the prior year and investigate significant variations b. Examine monthly performance reports and investigate significant revenue and expense variances c. Confirm customers' accounts receivable and clear all material exceptions d. Compare sales trends and profit margins with industry averages and investigate significant differences

Which of the following comparisons is most useful to an auditor in evaluating the results of an entity's operations? a. Prior year accounts payable to current year accounts payable b. Prior year payroll expense to budgeted current year payroll expense c. Current year revenue to budgeted current year revenue d. Current year warranty expense to current year contingent liabilities

Which of the following analytical procedures, should be applied to the income statement? a. Select sales and expense items and trace amounts to related supporting docusments b. Ascertain that the new income amount in the statement of cash flows agrees with the net income amount in the income statement c. Obtain from the client representatives, the beginning and ending inventory amounts that were used to determine costs of sales d. Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? a. Relationships involving balance sheet accounts b. Transactions subject to management discretion c. Relationships involving income statement accounts d. Data subject to audit testing in the prior year

An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this fraudulent financial reporting by a. Tracing a sample of journal entries to the general ledger b. Evaluating the effectiveness of internal control c. Investigating the reconciliations between controlling accounts and subsidiary records d. Performing analytical procedures designed to disclose differences from expectations

The auditor will most likely perform extensive tests for possible understatement of a. Revenues b. Assets c. Liabilities d. Capital

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following account most likely would yield the highest level of evidence? a. Accounts payable b. Advertising expense c. Accounts receivable d. Interest expense

Auditors sometimes use comparison ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a. Unrecorded purchases b. Unrecorded sales c. Merchandise purchases being charged to operating expense d. Fictitious sales

Which result of an analytical procedure suggests the existence of obsolete merchandise? a. Decrease in the inventory turnover rate b. Decrease in the ratio of gross profit to sales c. Decrease in the ratio of inventory to accounts payable d. Decrease in the ratio of inventory to accounts receivable

If accounts receivable turned over 8 times in 20x1 as compared to only 6 times in 20x2, it is possible that there were a. Unrecorded credit sales in 20x2 b. Unrecorded cash receipts in 20x1 c. More thorough credit investigations made by the company late in 20x1 d. Fictitious sales in 20x2

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. Variance analysis of actual versus budgeted amounts for production c. Comparing current year's depreciation expense with that of the prior year d. Reconciling fixed asset dispositions with the fixed asset ledger

Which of the following statements is not correct with respect to analytical procedures? a. Auditing standards require the use of analytical procedures b. Analytical procedures may be performed as substantive test c. Analytical procedures may be performed as test of control d. Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable

Most auditors prefer to replace tests of details with analytical procedures whenever possible because a. The analytical procedures are more reliable b. The tests of details are more expensive c. The analytical procedures are more persuasive d. The tests of details are more difficult to interpret

An auditor compares this year's revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor is most likely to learn that a. An increase in property tax rates has not been recognized in the client's accrual b. This year's provision for uncollectible account is inadequate because of worsening economic conditions c. December payroll taxes were not paid d. The client changed its capitalization policy for small tools during the year

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

Confirmations would almost always be used, assuming all the accounts below are material, for: a. Individual transactions between organizations, such as sales transactions b. Bank balances and accounts receivable c. Fixed asset additions d. Payroll expenses

You are auditing the company's purchasing process for goods and services. You are primarily concerned with the company not recording all purchase transactions. Which audit procedure below would be the most effective audit procedure in this case? a. Vouching from the accounts payable account to the vendor invoices b. Tracing vendor invoices to recorded amounts in the accounts payable account c. Confirmation accounts payable recorded amounts d. Reconciling the accounts payable subsidiary ledger to the accounts payable account

The practice of auditing firms to spread work throughout the year by carrying out as many auditing procedures as practicable before the balance sheet date, in order to minimize the load during the peak period. This is called a. Test of recorded transactions b. Confirmation of receivables and payables c. Observation and test-check of inventories d. Interim work

Which of the following statements is not true? a. Tests of transactions are often performed several months prior to the balance sheet date b. It is common to use analytical procedures at any time during the audit c. When controls are not considered effective, or when control deviations are discovered, substantive tests will be eliminated d. Tests of details of balances are normally done last

In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly? a. Analytical procedures b. Risk assessment procedures c. Tests of controls d. Tests of details

If no material differences are found using analytical procedures and the auditor concludes that misstatements are not likely to have occurred a. Other substantive tests may be reduced b. It will be necessary to increase the tests of balances c. It will not be necessary to perform tests of balances d. It will be necessary to increase the tests of transactions

Which of the following is considered further audit procedures that may be designed after assessing the risk of material misstatement? a. Substantive test of details; Risk assessment procedures b. Substantive test of details c. Risk assessment procedures d. None of the above

Which of the following audit tests is usually the least costly to perform? a. Analytical procedures b. Tests of controls c. Tests of details of balances d. Substantive tests of transactions

The objective of tests of details of transactions performed as substantive tests is to a. Monitor the design and use of the entity documents such as prenumbered shipping form b. Determine whether controls have been placed in operation c. Detect material misstatements in the account balances of the financial statements d. Evaluate whether controls operated effectively

C ##Footnote The auditor may use tests of details of transactions concurrently as tests of controls (i.e., as dual- purpose tests). As substantive procedures, their objective is to support relevant assertions or detect material misstatements in the financial statements. As tests of controls, their objective is to evaluate whether a control operated effectively

Analytical procedures are those that a. Evaluate the accuracy of the account balances b. Assess the overall reasonableness of transactions and balances c. Review the effectiveness of internal control procedures d. Analyze the effect of management procedures on the accounting system

Tests of details of balances are specific procedures intended to a. Test for monetary errors in the balances in the financial statements b. Provide that the accounts with material balances are classified correctly c. Prove that the trial balance is in balance d. Identify the details of the internal control system

The primary purpose of performing analytical procedures in the testing phase of an audit is to a. Help the auditor obtain an understanding of the client's industry and business b. Assess the going concerned assumption c. Indicate possible misstatements (attention directing) d. Reduce tests of details of balances

The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based is called a. Audit working papers b. Audit assertions c. Audit evidence d. Audit standards

The major reason an independent auditor gathers evidence is to a. Form an opinion on the financial statements b. Detect fraud c. Evaluate management d. Evaluate internal control

Which of the following is the best example of a corroborating evidence? a. General journal b. Worksheet cost allocations c. Vendor's invoice d. Cash receipts journal

Which of the following statements relating to the appropriateness of evidence is always true? a. Evidence from outside an enterprise is always reliable b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions c. Oral representations made by management are not reliable evidence d. Evidence must be both reliable and relevant to be considered appropriate

Which of the following is correct about the appropriateness of evidence? a. Audit evidence from external sources is more relevant than evidence generated internally b. Audit evidence is more persuasive when items of evidence from different sources or or different nature are not consistent c. Audit evidence generated internally is more reliable when the related accounting and internal control systems are effective d. Sufficiency refers to the amount of evidence needed

Which of the following statements about audit evidence is correct? a. Appropriateness is the measure of the quantity of audit evidence b. Sufficiency is the measure of the quality of audit evidence and its relevance to a particular assertion and its reliability c. Audit evidence is more persuasive when items of evidence from different sources or of different nature are consistent d. There should be a one-to-one relationship between audit objective and audit procedure

Evidence is generally considered appropriate when a. It has been obtained by random selection b. There is enough of its to afford a reasonable basis for an opinion on financial statements c. It has the qualities of being relevant, objective, and free form known bias d. It consists of written statements made by managers of the enterprise under audit

Evidence is generally considered sufficient when a. It is appropriate b. There is enough of it to afford a reasonable basis for an opinion on financial statements c. It has the qualities of being relevant, objective and free from unknown bias d. It has been obtained by random selection

Appropriateness of evidence is a measure of the a. Quantity of evidence b. Quality of evidence c. Sufficiency of evidence d. Meaning of evidence

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

Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the auditor? a. The type of opinion to be issued b. The auditor's evaluation of internal control c. The types of audit evidence available to the auditor d. Whether or not the client reports to the Securities and Exchange Commission

The sufficiency and appropriateness of evidence ultimately is based on the a. Availability of corroborating data b. Philippine Standards on Auditing c. Pertinence of the evidence d. Judgment of the auditor

Determine which of the following is most correct regarding the reliability of audit evidence a. Information that is indirectly obtained from external sources is the most reliable audit evidence b. Reliability of audit evidence is dependent upon the evidence being convincing c. Reliability of evidence refers to the amount of evidence obtained d. An effective internal control system provides more reliable audit evidence

An example of an external document that provides reliable information for the auditor is a. Employees' time reports b. Bank statements c. Purchase order for company purchases d. Carbon copies of checks

An example of a document the auditor receives from the client, but which was prepared by someone outside the client's organization, is a a. Confirmation b. Sales invoice c. Vendor invoice d. Bank reconciliation

Which of the following is the most reliable type of evidence? a. A written representation signed by the entity's CFO b. The physical count of securities and cash c. Inquiries of the credit manager about the collectability of noncurrent accounts receivable d. Observation of cobwebs on some inventory bins

Which of the following statements is generally correct about the appropriateness of evidence? a. The auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly from independent outside sources b. To be appropriate, evidence must be either reliable or relevant, but need not be both c. Accounting data alone may be considered sufficient appropriate evidence to issue an unqualified opinion of financial statements d. Appropriateness of evidence refers to the amount of corroborative evidence to be obtained

For audit evidence to be compelling to the auditor it must be sufficient and appropriate. Which statement below does not relate to the appropriateness of audit evidence? a. The more effective the internal control system, the more assurance it provides the auditor about the reliability of financial reporting by the client b. An auditor's opinion, to be economically useful and profitable to the auditing firm needs to be formed within a reasonable time and based on evidence obtained that assures profits for the auditing firm. c. Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity d. The independent auditor's direct personal knowledge, obtained through inquiry, observation and inspection, is generally more persuasive than information obtained indirectly

Which of the following procedures would provide the most reliable audit evidence? a. Inquiries of the client's internal audit staff held in private b. Inspection of prenumbered client purchase orders field in the vouches payable department c. Analytical procedures performed by the auditor on the entity's trial balnce d. Inspection of bank statements obtained directly from the client's financial institution

Which of the following forms of evidence would be least persuasive in forming the auditor's opinion about trading securities and other investments held by the company? a. Responses to auditor's questions by the president and controller regarding the investments account b. Correspondence with a stockbroker regarding the quantity of client's investments held by the broker c. Minutes of the board of directors authorizing the purchase of stock as an investment d. The auditor's count of marketable securities

In determining validity of accounts receivable, which of the following would the auditor consider to be the most reliable? a. Documentary evidence that supports the accounts receivable balance b. Credits to accounts receivable from the cash receipts book after the close of business at year-end c. Direct telephone communication between auditor and debtor d. Confirmation replies received directly from customers

Which of the following statements is not a correct use of the terminology in relation to audit evidence? a. Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within b. Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly c. Documents that originate outside the company are considered more reliable than those that originate within the client's organization d. External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client

Which of the following is not a characteristic of the appropriateness of evidence? a. Effectiveness of client internal controls b. Education of auditor c. Independence of information provider d. TImeliness of information

Which of the following types of audit evidence is the least persuasive? a. Prenumbered purchase order forms b. Bank statements obtained from the client c. Test counts of inventory performed by the auditor d. Correspondence from the client's attorney about litigation

Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below which provides the auditor within the most reliable audit evidence? a. General ledger account balances b. Confirmation of accounts payable balance received from a vendor c. Internal memo explaining the issuance of a credit memo d. Copy of month-end adjusting entries

Given the audit procedures below, which one provides the most reliable evidence about the validity of accounts receivable balance? a. Confirmations b. Recalculation c. Reperformance d. Observations

Audit evidence obtained directly by the auditor will not be reliable if a. The auditor lacks the competence to evaluate the evidence b. It is provided by the client's attorney c. The client denies its veracity d. It is impossible for the auditor to obtain additional corroboratory evidence

To be considered reliable evidence, confirmations must be controlled by: a. A client employee responsible for accounts receivable b. The external auditor c. A client's internal audit department d. A client's controller

Given the economic and time constraints in which auditors can collect evidence about management assertions about the financial statement, the auditor normally gathers evidence that is a. Irrefutable b. Conclusive c. Persuasive d. Completely convincing

When making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified. In addition, the goal of audit efficiency is to gather and evaluate the information a. No matter the cost involved in obtaining such evidence b. Even if cost is irrelevant to the auditor, because they bill the client for costs incurred c. At the lowest possible total cost d. At the cost suggested in the engagement letter

Which of the following forms of evidence is most reliable? a. General ledger account balances b. Confirmation of receivable balance received from a customer c. Internal memo explaining the issuance of a credit memo d. Copy of month-end adjusting entries

Evidence obtained directly by the auditor is more reliable than information obtained indirectly. Which of the following is not an example of the auditor's direct knowledge? a. Physical examination b. Observation c. Computation d. Inquiry

Which of the following "decisions" are relevant to the auditor's evidence accumulation? a. Type of audit procedure to use b. Number of items to examine c. Timing of audit procedures d. All of the above are relevant

For a given audit procedure, the evidence obtained from a sample of 200 would ordinarily be a. More sufficient than from a sample of one hundred b. Less sufficient than from a sample of one hundred c. More competent than from a sample of one hundred d. Less competent than from a sample of one hundred

Which of the following statements regarding the relevance of evidence is correct? a. To be relevant, evidence must pertain to the question at hand b. To be relevant, evidence must be persuasive c. To be relevant, evidence must relate to multiple audit objectives d. To be relevant, evidence must be evaluated in terms of the general audit objectives

Which one of the following is not one of the characteristics of reliable evidence? a. Independence of provider b. Effectiveness of internal control structure c. Size of the sample d. Degree of objectivity

An example of external documents is a. Employees' time reports b. Bank statements c. Purchase order for company purchases d. Carbon copies of checks

Which of the following statements is not correct? a. It is possible to vary the sample size from one unit to 100% of the items in the population b. The decision of how many items to test will not be influenced by the increased costs of performing the additional tests c. The decision of how many items to test must be made by the auditor for each audit procedure d. The sample size for any given procedure is likely to vary from audit to audit

It refers to the material (working papers) prepared by and for, or obtained and retained by the auditor in connection with the performance of the audit a. Documentation b. Audit report c. Accounting data d. Corroborative evidence

Which of the following best describes one of the primary objectives of audit documentation? a. Defend against claims of a deficient audit b. Provide a principal support for the income tax return c. Provide documentation that the audit was conducted in accordance with auditing standards d. Provide additional support of recorded amounts to the client

Which one of the following is not one of the primary purposes of audit documentation prepared by the audit team? a. A basis for planning the audit b A record of the evidence accumulated and the results of the tests c. A basis for review by supervisors and partners d. A basis for determining work deficiencies by peer review teams

Which of the following statements is incorrect about the working papers prepared by the auditor? a. The auditor should record in the working papers information on planning the audit work, the nature, timing and extent of the audit procedures performed, the results thereof, and the conclusions reached from the audit evidence obtained b. The extent of working paper documentation is a matter of professional judgment c. Working papers should be in the form of data stored on paper d. Working papers should be designed and organized to meet the circumstances and the auditor's need for each individual audit

Which of the following is one of the objectives of audit documentation? a. To defend against claims of a deficient audit b. To support auditor's representation of compliance with PSA c. Provide reasonable assurance that the financial statements are fairly presented d. None of the above

Which of the following statements is not correct concerning audit documentation? a. Audit documentation is merely required to defend against claims that the auditor performed a deficient audit b. The only time anyone has a legal right to examine audit documentation is when the documentation is subpoenaed by a court as legal evidence c. Audit documentation is the primary frame of reference used by supervisory personnel to evaluate the sufficiency of evidence d. All of the above are incorrect statements

Which of the following statements is correct about working papers? a. Working papers should include documentation prepared by the client b. Every matter the auditor considers in an audit must be documented in the working papers c. In determining the extent of working paper documentation it may be useful to consider what would be necessary to provide another auditor who has no previous experience with the audit an understanding of the detailed aspects of the audit d. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall understanding of the audit

Which of the following is not one of the primary purposes of working papers? a. To assist in planning and performance of the audit b. To assist in the supervision and review of work c. To record the audit evidence resulting from audit work performed to support the auditor's opinion d. To substitute the client's accounting records

An auditor's working papers serve mainly to a. Provide the principal support for the auditor's report b. Satisfy the auditor's responsibilities concerning the Code of Professional Ethics c. Monitor the effectiveness of the CPA firm's quality control procedures d. Document the level of independence maintained by the auditor

Which of the following statements concerning working papers is incorrect? a. An auditor may support an opinion by other means in addition to working papers b. The form of working papers should be designed to meet the circumstances of a particular engagement c. An auditor's working papers may not serve as a reference source for the client d. Working papers should show that the internal accounting control system has been studied and evaluated to the degree necessary

Which of the following factors most likely affects the auditor's judgment about the quantity, type, and content of working papers? a. The nature and condition of the client's accounting and internal control systems b. The content of the client's representation letter c. The timing of substantive tests completed prior to the balance sheet date d. The usefulness of the working papers as a reference source for the client

Which of the following is not a factor that affects the independent auditor's judgment as to the quantity, type and content of working papers? a. The timing and the number of personnel to be assigned to the engagement b. The nature of the engagement c. The need for supervision of the engagement d. Forms of the report

An auditor's working papers will generally not include documentation showing how the a. Client's schedules were prepared b. Engagement had been planned c. Client's system of internal control had been reviewed and evaluated d. Unusual matters were resolved

Due care in the matter of audit documentation requires that audit documentation of the evidence gathered by the auditor meets which of the following criteria? a. Workpapers be indexed to the general ledger accounts and include both a permanent file and a general file b. The content be sufficient to provide support for the auditor's opinion, including the auditor's representation as to compliance with auditing standards c. Audit evidence is principally gathered to determine if the client's financial statements, as prepared by management, can be relied upon to make managerial decision about the firm d. Audit evidence as displayed in the workpapers is primarily performed to protect the auditing firm in the case of a lawsuit by investors

Audit files that are updated with need information of continuing importance is called a. Current files b. Working paper file c. Permanent files d. Correspondence

Which of the following statements about working papers is correct? a. Working papers are not permitted to be used as a reference source by the client b. The auditor should document the understanding of the client's internal control obtained to plan the audit c. Working papers may be regarded as a substitute for the client's accounting records d. When reporting on comparative financial statements, the independent auditor may discard working papers after two years

PSA 230 provides general guidelines about the ownership, custody and confidentiality of working papers. According to PSA 230, a. Working papers are the personal property of the auditor and the client has no rights to the working papers prepared by the auditor b. The working papers should be retained by the auditor for a sufficien t period of time but not to exceed five years c. Working papers should not be made available to the client d. Working papers may be considered a substitute for the client's accounting records

Working papers would not include a. Information concerning the legal and organizational structure of the entity b. Letters of representation received from the entity c. Copies of the financial statements and the auditor's report d. Documentation showing how the client's schedules are prepared

The permanent (continuing) file of an auditor's working papers most likely would include copies of the a. Bank statements b. Lead schedules c. Debt agreements d. Attorney's letters

Although the quantity and content of the audit working papers vary with each particular engagement, an auditor's permanent files most likely include a. Schedules that support the current year's adjusting entries b. Prior year's accounts receivable confirmations that were classified as exceptions c. Documentation indicating that the audit work as adequately planned and supervised d. Analyses of capital stock and other owners' equity accounts

The permanent file of an auditor's working papers generally would not include a. Bond indenture agreements b. Working trial balance c. Lease agreements d. Flowchart of the internal control structure

The current file of the auditor's working papers generally should include a. A flowchart of the internal accounting controls b. A copy of the financial statements c. Organization charts d. Copies of bond and note indentures

The current file of an auditor's working papers most likely would include a copy of the a. Bank reconciliation b. Articles of incorporation c. Pension plan contract d. Flowchart of the internal control procedures

For what minimum period should audit working papers be retained by the independent CPA? a. For the period during which the entity remains a cleint of the independent CPA b. For the period during which an auditor-client relationship exists but not more than six years c. For the statutory period within which legal action may be brought against the independent CPA d. For as long as the CPA is in public practice

Which of the following statements about working papers is correct? a. Working papers may be permitted to be used as a reference source by the client b. The auditor should document the basis for assessing control risk at the maximum level c. Working papers provide principal support for the financial statements d. The independent auditor may discard working papers after two years

Which statement is correct concerning the deletion of audit documentation? a. Superseded audit documentation should always be deleted from the audit file b. After the audit file has been completed, the auditor should not delete or discard audit documentation c. Auditors should use professional skepticism in determining which audit documentation should be deleted d. Audit documentation should never be deleted from the audit file

What client information is needed by auditors in creating lead schedules? a. Interim statement prepared by the client b. General ledger information, including unadjusted ending balances and beginning balances for accounts c. A schedule of adjusting entries made by the client for all balance sheet accounts d. Detailed transaction information that may explain the changes in balance sheet accounts for the current year under audit

Audit documentation should possess certain characteristics. Which of the following is true regarding those characteristics? I. Audit documentation should be indexed and cross-referenced II. Audit documentation should be organized to benefit the client's staff a. Both statements are true b. Both statements are false c. Statement I is true but Statement II is false d. Statement I is false but Statement II is true

The main advantage of properly indexed working papers is to a. Reduce the size of the file b. Better organize the working papers c. Allow division of labor within the audit team d. Facilitate the efficient use of audit staff

During the working paper review, an audit supervisor finds that the auditor's reported findings are not adequately cross-referenced to supporting documentation. The supervisor will most likely instruct the auditor to a. Prepare a working paper to indicate that the full scope of the audit was carried out b. Familiarize him/herself with the sequence of working papers so that he(she) will be able to answer questions about the conclusions stated in the report c. Eliminate any cross-references to other working papers since the system is unclear d. Provide a workpaper indexing system that shows the relationship between finds, conclusions, and the related facts

The principal purpose for cross-indexing audit working papers is to a. Give the working papers a professional appearance b. Explain the use of tick marks c. Provide explanation of the audit steps performed d. Provide a trail for the auditor and the reviewer

Audit documentation must contain sufficient information to allow what type of auditor to understand the nature, timing, extent, and results of procedures performed? a. An experienced team member b. An experienced auditor having no previous connection with engagement c. Any certified public accountant d. An auditor qualified as a peer review specialist

The primary objective of a CPA's observation of a client's physical inventory count is to a. Discover whether a client has counted particular inventory items or group of items b. Obtain direct knowledge that the inventory exists and has been properly counted c. Provide an appraisal of the quality of merchandise on hand on the day of the physical count d. Allow the auditor to supervise the conduct of the count so as to obtain assurance that inventory quantities are reasonably accounted

A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor would probably a. Increase the extent of tests of controls of the inventory cycle b. Request the client to schedule the physical inventory count at the end of the year c. Insist that the client perform physical counts of inventory items several times during the year d. Apply gross profit tests to ascertain the reasonableness of the physical counts

The audit of year-end physical inventories should include steps to verify that the client's purchases and sales cut-offs are adequate. The audit steps should be designed to detect whether merchandise included in the physical count at year-end was not recorded as a a. Sale in the subsequent period b. Sale in the current period c. Purchase in the current period d. Purchase return in the subsequent period

After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items a. Included in the listing have been counted b. Represented by inventory tags are included in the listing c. Included in the listing are represented by inventory tags d. Represented by inventory tags are bona fide

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of a. Existence or occurrence b. Completeness c. Rights and oblgiation d Valuation or allocation

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace a. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule b. Inventory tags noted during the auditor's observation to items listed in receiving reports and vendor's invoices c. Items listed in the inventory listing schedule to inventory tags and the auditor's recorded count sheets d. Items listed in receiving reports and vendors' invoices to the inventory listing schedule

The physical counts of inventory of a retailer was higher than shown by the perpetual records. Which of the following could explain the difference? a. Inventory items had been counted but the tags placed on the items had not been taken off the items and added to the inventory accumulation sheets b. Credit memos for several items returned by cutomers had not been recorded c. No journal entry had been made on the retailers books for several items returned to its suppliers d. An item purchased "FOB shipping point" had not arrived at the date of the inventory count and had not been reflected in the perpetual records

For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to record some a. Purchases returned to vendors b. Sales discounts allowed c. Sales returns received d. Cash receipts

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client's ending inventory? a. Compare the physical quantities of slow-moving items with corresponding quantities of the prior year b. Observe merchandise and raw material during the client's physical inventory atking c. Review the management's inventory representation letter for accuracy d. Test overall fairness of inventory values by comparing the company's turnover ratio with the industry average

Which of the following is the best audit test to evaluate the accuracy of the inventory records for materials inventory in a production operation? a. Trace selected inventory receipts to perpetual inventory records b. Vouch selected postings in the perpetual inventory records to source documents c. Perform turnover tests for materials inventory d. Reconcile quantities on hand per physical counts of selected items with perpetual inventory records and verify pricing

An auditor's observation of physical inventories at the main plant at year-end provides direct evidence to support which of the following objectives? a. Accuracy of the priced-out inventory b. Evaluation of lower of cost or NRV test C. Identification of obsolete or damaged merchandise to evaluate allowance for obsolescence d. Determination of goods on consignment at another location

It is an approximation of the amount of an item in the absence of a precise means of emasurement a. Accounting estimate b. Audit sampling c. Materiality d. Audit risk

In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estiamtes are a. Not subject to bias b. Consistent with industry guidelines c. Based on objective assumptions d. Reasonable in the circumstances

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are a. consistent with prior periods b. Similar to industry guidelines c. Objective and not susceptible to bias d. Deviations from historical pattterns

The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimate I. Review and test the prcoess used by management II. Use an independent estimate for compariosn with that prepared by management III. Review subsequent events which confirm the estimate made a. Any of the above b. none of the above c. Either I or II d. I only

In evaluating the assumptions on which the estimate is based, the auditor would need to pay particular attention to assumptions which are a. Reasonable in light of actual results in prior periods b. Consistent with those used for other accounting estimates c. Consistent with management's plans which appear appropriate d. Subjective or susceptible to material misstatement

Which of the following statements is incorrect about accounting estimates? a. Management is responsible for making accounting estimates included in the financial statements b. The risk of material misstatement is greater when accounting estimates are involved c. The evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive than evidence available to support other items in the financial statements d. When evaluating accounting estimates, the auditor should pay particular attention to assumptions that are objective and are consistent with industry patterns

Which of the following would an auditor generally perform to obtain assurance that accounting estimates are properly accounted for and disclosed a. Inquiry of management b. Make an independent estimate for comparison with client's estimate c. Review subsequent events d. Obtain knowledge about the applicable financial reporting standards related to the accounting estimate

Which of the following procedures would an auditor least likely perform when evaluating the reasonableness of management's estimates? a. Make an independent estimates for comparison with management estimates b. Read the minutes of board of directors' meeting c. Review and test the process used by management d. Review subsequent events which confirm the estimates made

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness? a. Develop independent expectations of maangemetn's estimates b. Consider the apporpriateness of the key factors or assumption used in preparing thestimates c. Test the calculations used by the management in developing the estimates d. Obtain an understanding of how management developed its estimates

Most auditors assess inherent risks as high for related parties and related-party transactions because a. Of the accounting disclosure requirement b. Of the lack of independence between the parties c. Both A and B d. Neither A nor B

Which of the following is not one of the primary reasons why auditors should be aware of related parties and transactions between such parties? a. PFRS requires disclosure of the related party transactions if they are material b.The existence or related parties or related party transactions may affect the financial statements and the reliability of audit evidence c. A related party transaction may be motivated by other than ordinary business considerations d. PFRS requires that related party transactions be recorded in their equivalent arm's-length transaction

The primary concern of the auditor regarding related party transactions is that a a. They are reported to proper regulatory authorities because they are illegal b. Their form be emphasized rather than their economic substance c. Their existence and significance be adequately disclosed d. Their effects are eliminated from the financial statements

The auditor determines that JIn 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. Landlord has weak internal controls over billings c. Related party transaction in which a major shareholder owns the office tower d. Jin Company is engaging in fraudulent activities

The least effective method of identifying related parties would be a. An inquiry of management b. A review of SEC filings c. A review of the purchases and sales journals for the period under audit d. An examination of stockholders' listings to identify principal stockholders

Which of the following is not considered a related part? a. Affiliated copanies b. Principal owners of the company c. Line employees of the company d. Members of company management

Related parties are commonly identified in which of the following ways? a. Review of SEC filings b. Examination of stockholder listings c. Inquiry of management d. All of the above

Which of the would not necessarily be a related-party transaction? a. Sale to another corporation with a similar name b. Purchases from another corporation that is controlled by the corporation's chief stockholder c. Loan from the corporation to a major stockholder d. Sale of land to the corporation by the spouse of a director

Which of the following is most likely to indicate the existence of related parties? a. Writing down obsolete inventory just before year-end b. Failing to correct previously identified internal control deficiencies c. Depending on a single product for the success of the entity d. Borrowing money at an interest rate significantly below the market rate

Related party transactions 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

Which of the following auditing procedures is most likely to assist an auditor in identifying related party transactions? a. Retesting ineffective controls previously reported to the audit committee b. Sending second requests for unanswered positive confirmations of accounts receivable c. Reviewing information provided by management identifying related parties and being alert for other material related party transactions d. Inspecting communications with law firms for evidence of unreported contingent liabilities

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities b. Vouching accounting records for recurring transactions recorded just after the balance sheet date c. Reviewing confirmations of loans receivable and payable for indications of guarantees d. Performing analytical procedures for indications of possible financial difficulties

After determining that a related party transaction has in fact occurred, an auditor should a. Add a separate paragraph to the auditor's standard report to explain the transactions b. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded c. Obtain an understanding of the business purpose of the transaction d. Substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction

When auditing related party transaction, an auditor places primary emphasis on a. Ascertaining the rights and obligations of the related parties b. Confirming the existence of the related parties c. Verifying the valuation of the related party transactions d. Evaluating the disclosure of the related party transactions

A person or firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing is called a/an a. Professional b. Consultant c. Expert d. Assistant

Which of the following is not an expert upon whose work an auditor may rely? a. Actuary b. Internal auditor c. Appraiser d. Engineer

During an audit, the auditor may need the assistance of an expert in obtaining sufficient appropriate evidence. A common example is a. Evaluating the potential financial statement effect of an employee fraud b. Determination of the amounts using actuarial computations c. Evaluating the integrity of management d. Determining the sufficiency and appropriateness of evidence obtained

Each of the following procedures requires the assistance of an expert except a. Determining the physical condition or quantity of underground mineral b. Determining the value of works of art c. Interpreting major contracts d. Determining the adequacy of disclosure in the notes to the financial statements

An expert whose expertise is used by the entity in preparing financial statements is called a(n): a. Financial expert b. Management expert c. Auditor's expert d. Specialist

An expert whose expertise is used by the firm in obtaining sufficient appropriate evidence is called a(n): a. Financial expert b. Management expert c. Auditor's expert d. Specialist

When may the auditor refer to an expert's work in the audit report? Only if the expert's report results in a modification of the auditor's opinion; Only when the expert assisted in the audit of the financial statements a. Yes; Yes b. Yes; No c. No; No d. No; yes

Which of the following least likely requires the services of an expert? a. Valuations of certain types of assets like land and buildings b. Legal opinions concerning interpretations of engagements, statutes and regulations c. Determination of amounts using specialized techniques d. Application of accounting methods in computing inventory balances

Which of the following would be least likely to be taken into account when evaluating the need to use the work of an expert? a. The cost of using the services of an expert b. The quantity and quality of other audit evidence available c. The materiality of the financial statement item being considered d. The risk of misstatement based on the nature and complexity of the matter being considered

The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor's study and evaluation of the internal control because the: a. Audit programs, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor's staff b. Procedures performed by the internal audit staff may eliminate the independent auditor's need for an extensive study and evaluation of internal control c. Work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures d. Understanding of the internal audit function is an important substantive test to be performed by the independent auditor

The work of internal auditors may affect the independent auditor's I. Procedures performed in obtaining an understanding of the internal control II. Procedures performed in assessing the risk of material misstatement III. Substantive procedures performed in gathering direct evidence a. I and II only b. I and III only c. II and III only d. I, II, and III

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 the assertions about the a. Existence of contingencies b. Valuation of intangible assets c. Existence of fixed asset additions d. Valuation of related party transactions

When the external auditors plan to rely on the work of internal auditors, they need to evaluate the internal auditors' a. Integrity b. Objectivity c. Competence d. All of the above

The scope and objective of internal auditing vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal auditing activities include one or more of the following, except a. Examination of financial and operating information including review of the means to identify, measure, classify, and report such information and specific inquiry into individual items including detailed testing of transactions and recommending improvements thereto b. Review of the economy, efficiency and effectiveness of operations including non-financial controls of an entity c. Establishment of adequate accounting and internal control systems d. Review of compliance with laws, regulations and other external requirements and with management policies and directives and other internal requirements

Which of the following statements about the internal auditor and the external auditor is not correct? a. The role of internal auditing is determined by the management and its objectives differ from those of the external auditor who is appointed to report independently on the financial statements b. The external auditor has the sole responsibility for the audit opinion expressed and that responsibility is not reduced by any use made of internal auditing c. Internal auditors should exercise the same degree of independence as required of the external auditor d. All judgements relating to the audit of the financial statements are those of the external auditor

Which of the following statements in relation to the preliminary assessment of internal auditing is false? a. The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach b. During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas. c. Effective internal auditing can eliminate the need to perform essential external audit procedures d. In some cases, after having considered the activities of internal auditing, the external auditor may decide that internal auditing will have no effect on external audit procedures

When obtaining an understanding and performing a preliminary assessment of the internal audit function, the important criteria includes organization status, scope of function, technical competence and due professional care. Which of the following statements relates to the criteria of due professional care? a. The internal auditor should be free to communicate fully with the external auditor b. the management should act on internal audit recommendations c. There should be appropriate policies for hiring and training the internal auditing staff d. There should be adequate audit manuals, work programs and working papers

To operate effectively, an internal auditor must be independent of a. The line functions of the organization b. The entity c. The employer-employee relationship which exists for other employees in the organization d. The audit committee of the board of directors

An independent auditor might consider the procedures performed by the internal auditors because a. They are employees whose work must be reviewed during substantive testing b. Their work affects the cost benefit trade-off c. They are employees whose work may affect the nature, timing, and extent of audit procedures d. Their degree of independence may be inferred from the nature of their work

When obtaining an understanding and performing a preliminary assessment of the internal audit function,, the auditor should consider the internal auditors' a. Organizational status; Scope of functions; Technical competence and due care b. Organizational status; Technical competence and due care c. Organizational status d. Scope of functions

To assess the objectivity of the internal auditors, an independent auditor would most likely a. COnsider the professional qualifications and experience of the internal auditors b. Consider the organizational level to which the internal auditors report the results of their work c. Consider proper planning, supervision and documentation of internal auditor's work d. Consider the nature and extent of the internal auditors' assignment

Allen Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably a. Estimate tests of controls b. Increase the depth of the study and evaluation of administrative controls c. Avoid duplicating the work performed by the internal audit staff d. Place limited reliance on the work performed by the internal audit staff

In assessing the competence an objectivity of an entity's internal auditor, an independent auditor would least likely consider information obtained from a. Discussions with management personnel b. External quality reviews of the internal auditor's activities c. Previous experience with the internal auditor d. The results of analytical procedures