Multiple-Choice Questions
Multiple-Choice Questions
com
Chapter 6
Multiple-Choice Questions
1.
easy
a
The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. the fairness of the financial statements.
b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the balance sheet and income statement.
2.
easy
c
If the auditor believes that the financial statements are not fairly stated or is unable to reach an
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 auditors report.
d. should notify regulators of the circumstances.
3.
easy
d
4.
easy
b
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. companys internal audit department.
5.
easy
a
The auditors best defense when material misstatements are not uncovered is to have conducted
the audit:
a. in accordance with auditing standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the management team.
6.
easy
a
If management insists on financial statement disclosures that the auditor finds unacceptable, the
auditor can:
Issue an adverse audit report
Issue a qualified audit report
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
7.
easy
b
If management insists on financial statement disclosures that the auditor finds unacceptable, the
auditor can do all but which of the following?
a. Issue an adverse audit report.
b. Issue a disclaimer of opinion.
c. Withdraw from the engagement.
d. Issue a qualified audit report.
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8.
easy
d
Which of the following is not one of the reasons that auditors provide only reasonable
assurance 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.
9. (Public)
challenging
c
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.
10.
easy
a
Which of the following statements is 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.
11. (SOX)
easy
c
12.
easy
b
13.
easy
d
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 and understandability assertion.
14.
easy
b
15.
easy
c
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
that misstatements, whether caused by errors or fraud, that are not ________ are detected.
a.
b.
c.
d.
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16.
easy
c
17.
easy
c
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.
18.
easy
a
19.
easy
a
20.
easy
c
Which of the following is the auditor least likely to do when aware of an illegal act?
a. Discuss the matter with the clients 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 companys management.
21.
medium
c
The auditor gives an audit opinion on the fair presentation of the financial statements and
associates his or her name with it when, on the basis of adequate evidence, the auditor
concludes that the financial statements are unlikely to mislead:
a. investors.
b. management.
c. a prudent user.
d. the reader.
22.
medium
b
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.
23.
medium
a
When engaged to audit the financial statements, it is acceptable for the auditor to draft:
a.
b.
c.
d.
24.
medium
The auditor has considerable responsibility for notifying users as to whether or not the
statements are properly stated. This imposes upon the auditor a duty to:
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a.
b.
c.
d.
25.
easy
b
The auditor should not assume that management is dishonest, but the possibility of dishonesty
must be considered. This is an example of:
a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. a rule in the AICPAs Code of Professional Conduct.
26.
medium
d
If the auditor were responsible for making certain that all of managements 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 feasible.
27.
medium
d
The auditors best defense when existing material misstatements in the financial statements are
not uncovered in the audit is:
a. the audit was conducted in accordance with generally accepted accounting principles.
b. the financial statements are the clients responsibility.
c. the client is guilty of contributory negligence.
d. the client is guilty of fraudulent misrepresentation.
28.
medium
a
29.
challenging
c
30.
medium
c
Auditing standards make _____ distinction(s) between the auditors responsibilities for
searching for errors and fraud.
a. little
b. a significant
c. no
d. various
31.
medium
b
In comparing management fraud with employee fraud, the auditors 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 managements 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.
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32.
medium
a
Which of the following statements is correct with respect to the auditors responsibilities
relative to the detection of indirect-effect illegal acts?
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
b. The auditor has the same responsibility for searching for indirect-effect illegal acts as any
other potential misstatement that may occur.
c. Auditors have responsibility for searching for any illegal act, whether direct-effect or
indirect-effect.
d. Discovery of indirect-effect illegal acts is usually easier than discovery of fraud.
33.
medium
c
When comparing the auditors 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 either one.
d. on the senior auditor for detecting errors and on the manager for detecting employee fraud.
34.
medium
a
If several employees collude to falsify documents, the chance a normal audit would uncover
such acts is:
a. very low.
b. very high.
c. zero.
d. none of the above.
35.
medium
d
When planning the audit, if the auditor has no reason to believe that illegal acts exist, the
auditor should:
a. include audit procedures which have a strong probability of detecting illegal acts.
b. still include some audit procedures designed specifically to uncover illegalities.
c. ignore the issue.
d. make inquiries of management regarding their policies for detecting and preventing illegal
acts and regarding their knowledge of violations, and then rely on normal audit procedures
to detect errors, irregularities, and illegalities.
36.
medium
When the auditor has reason to believe an illegal act has occurred, the auditor should:
a. inquire of management only at one level below those likely to be involved with the
illegality.
b. begin communication with the FASB in accordance with PCAOB regulations.
c. consider accumulating additional evidence to determine if there is actually an illegal act.
d. withdraw from the engagement.
37.
medium
b
When the auditor knows that an illegal act has occurred, the auditor 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.
38. (Public)
medium
c
If an auditor uncovers an illegal act at a public company, the auditor must notify:
a. local law enforcement officials.
b. the Public Company Accounting Oversight Board.
c. the Securities and Exchange Commission.
d. all of the above.
39.
medium
a
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.
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d.
40.
medium
b
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 indirect-effect illegal acts.
41.
medium
a
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.
42.
medium
a
43.
medium
a
44.
medium
b
Which of the following statements is true regarding the distinction between general audit
objectives and specific audit objectives for each account balance?
a. The specific audit objectives are applicable to every account balance on the financial
statements.
b. The general audit objectives are applicable to every account balance on the financial
statements.
c. The general audit objectives are stated in terms tailored to the engagement.
d. For any given class of transactions, usually only one audit objective must be met to
conclude the transactions are properly recorded..
45.
medium
c
Which of the following statements about the existence and completeness assertions is not true?
a. The existence and completeness assertions emphasize different audit concerns.
b. Existence deals with overstatements and completeness deals with understatements.
c. Existence deals with understatements and completeness deals with overstatements.
d. The completeness assertion deals with unrecorded transactions.
46.
medium
b
47.
medium
b
Which of the following management assertions is not associated with transaction-related audit
objectives?
a. Occurrence
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b.
c.
d.
48.
medium
d
49.
medium
b
50.
medium
b
The detail tie-in objective is not concerned 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.
51.
medium
b
52.
medium
a
Which of the following is not a proper match of a transaction-related audit objective and
management assertion?
a. Accuracy and cutoff.
b. Classification and classification.
c. Posting and summarization with accuracy.
d. Occurrence and occurrence.
53.
medium
d
54.
medium
a
Two overriding considerations affect the many ways an auditor can accumulate evidence:
1. Sufficient appropriate evidence must be accumulated to meet the auditors 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.
55.
If the auditor has obtained a reasonable level of assurance about the fair presentation of the
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medium
b
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.
56.
medium
d
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 AICPAs Code of Professional Conduct.
c. generally accepted accounting principles.
d. the auditors professional judgment.
57.
medium
c
58.
medium
b
If an auditor conducted an audit in accordance with auditing standards, which of the following
would the auditor likely detect?
a. Unrecorded transactions.
b. Incorrect postings of recorded transactions.
c. Counterfeit signatures on paid checks.
d. Fraud involving collusion.
59.
medium
a
Which of the following statements best describes the auditors responsibility with respect to
illegal acts that do not have a material effect on the clients financial statements?
a. Generally, the auditor is under no obligation to notify parties other than personnel within
the clients 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 auditors report.
d. Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act.
60.
medium
c
Which of the following statements best describes the auditors 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 must extend auditing procedures to actively search for evidence of fraud in all
situations.
c. The auditor must extend auditing procedures to actively search for evidence of fraud
where the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion
is issued.
61.
medium
b
62.
The primary difference between an audit of the balance sheet and an audit of the income
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medium
a
statement is that the audit of the income statement deals with the verification of:
a. transactions.
b. authorizations.
c. costs.
d. cutoffs.
63.
challenging
c
The auditors evaluation of the likelihood of material employee fraud is normally done initially
as a part of:
a. tests of controls.
b. tests of transactions.
c. understanding the entitys internal control.
d. the assessment of whether to accept the audit engagement.
64.
challenging
c
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.
65.
challenging
c
66.
challenging
b
67.
challenging
a
With respect to the detection of illegal acts, auditing standards state that the auditor provides:
a. no assurance that they will be detected.
b. the same reasonable assurance provided for other items.
c. assurance that they will be detected, if material.
d. assurance that they will be detected, if highly material.
68.
challenging
d
In describing the cycle approach to segmenting an audit, which of the following statements is
not true?
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.
69.
challenging
c
Which of the following journals would be included most often in the various audit cycles?
a. Cash receipts journal.
b. Cash disbursements journal.
c. General journal.
d. Sales journal.
70.
challenging
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b.
c.
d.
71.
challenging
a
After general audit objectives are understood, specific audit objectives for each account balance
on the financial statements can be developed. Which of the following statements is true?
a. There should be at least one specific objective for each relevant general objective.
b. There will be only one specific objective for each relevant general objective.
c. There will be many specific objectives developed for each relevant general objective.
d. There must be one specific objective for each general objective.
72.
challenging
a
An auditor should recognize that the application of auditing procedures may produce evidence
indicating the possibility of errors or 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 most recorded transactions and records of an entity.
Essay Questions
73.
easy
Discuss the differences between errors, frauds, and illegal acts. Give an example of each.
Answer:
The primary difference between errors and frauds is that errors are unintentional
misstatements of the financial statements, whereas frauds are intentional misstatements.
Illegal acts are violations of laws or government regulations, other than frauds. An
example of an error is a mathematical mistake when footing the columns in the sales
journal. An example of a fraud is the creation of fictitious accounts receivable. An
example of an illegal act is the dumping of toxic waste in violation of the federal
environmental protection laws.
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74.
medium
Discuss the actions an auditor should take when the auditor discovers an illegal act.
Answer:
The auditor should first consider the effects of the illegal act on the financial statements,
including the adequacy of disclosures. If the auditor concludes that disclosures are
inadequate, the audit report should be modified accordingly. The auditor should also
consider the effect of the illegal act on its relationship with management, and
managements trustworthiness. Next, the clients audit committee or others of equivalent
authority should be informed of the illegal act. If the client does not deal with the illegal
act in a satisfactory manner, the auditor should consider withdrawing from the
engagement. Finally, if the client is publicly held, the auditor may need to report the
matter to the SEC.
75.
medium
There are three broad categories of management assertions. Identify each of these categories.
Answer:
Assertions about classes of transactions and events for the period under audit.
Assertions about account balances at period end.
Assertions about presentation and disclosure.
76.
medium
Briefly explain each management assertion related to classes of transactions and events for the
period under audit.
Answer:
Occurrence. Transactions and events that have been recorded have occurred and
pertain to the entity.
Completeness. All transactions and events that should have been recorded have been
recorded.
Accuracy. Amounts and other data relating to recorded transactions and events have
been recorded appropriately.
Classification. Transactions and events have been recorded in the proper accounts.
Cutoff. Transactions and events have been recorded in the correct accounting period.
77.
medium
Briefly explain each management assertion related to account balances at period end.
Answer:
Existence. Assets, liabilities, and equity interests exist.
Completeness. All assets, liabilities, and equity interests that should have been
recorded have been recorded.
Valuation and allocation. Assets, liabilities, and equity interests are included in the
financial statements at appropriate amounts and any resulting valuation adjustments
are appropriately recorded.
Rights and obligations. The entity holds or controls the rights to assets, and liabilities
are the obligation of the entity.
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78.
medium
79.
medium
Discuss three reasons why auditors are responsible for reasonable but not absolute
assurance.
Answer:
Most audit evidence results from testing a sample of a population. Sampling involves
some risk of not uncovering material misstatements.
Accounting presentations contain complex estimates, which inherently involve
uncertainty and can be affected by future events. As a result, the auditor has to rely on
evidence that is persuasive but not convincing.
Fraudulently prepared financial statements are often very difficult for the auditor to
detect, especially when there is collusion among management.
80.
medium
Distinguish between managements responsibility and the auditors responsibility for the
financial statements under audit.
Answer:
Management is responsible for adopting appropriate accounting policies, maintaining
adequate internal control, and making fair representations in the financial statements. The
auditors responsibility is to perform an audit designed to provide reasonable assurance of
detecting any material misstatements in the financial statements and to express an opinion
on those financial statements at the conclusion of the audit.
81.
medium
In the context of the audit of sales, distinguish between the existence and completeness
transaction-related audit objectives. State the effect on the sales account (overstatement or
understatement) of a violation of each objective.
Answer:
When testing the existence objective for sales, the auditors focus is on whether the sales
that have been recorded in the sales journal actually occurred. In contrast, tests of the
completeness objective are concerned with determining whether all sales that actually
occurred have been recorded in the sales journal. Violations of the existence objective
result in overstatements of sales; violations of the completeness objective result in
understatements of sales.
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82.
challenging
Discuss the differences in the auditors responsibilities for discovering (1) material errors, (2)
material fraud (3) direct-effect illegal acts, and (4) indirect-effect illegal acts.
Answer:
Auditing standards make no distinction between the auditor's responsibilities for searching
for errors and fraud. In either case, the auditor must obtain reasonable assurance about
whether the statements are free of material misstatements. The standards also recognize
that fraud is often more difficult to detect because management or the employees
perpetrating the fraud attempt to conceal the fraud. Still, the difficulty of detection does
not change the auditor's responsibility to properly plan and perform the audit to detect
material misstatements, whether caused by error or fraud. The auditors responsibility for
uncovering direct-effect illegal acts is the same as for errors and fraud. However, the
auditor is not required to search for indirect-effect illegal acts unless there is reason to
believe they exist.
83.
challenging
A financial statement audit typically consists of four phases. Identify each of these four phases
of an audit and discuss the major activities performed by the auditor in each phase.
Answer:
Phase I: Plan and design an audit approach. In this phase, the auditor obtains an
understanding of the clients entity and its environment. In addition, the auditor obtains an
understanding of the clients internal control and assesses the risk of material
misstatement.
Phase II: Perform tests of controls and substantive tests of transactions. In this phase, the
auditor tests those internal controls he/she believes may be effective at preventing or
detecting misstatements. In addition, the auditor performs substantive tests of transactions
to verify the monetary amounts of transactions.
Phase III: Perform analytical procedures and tests of details of balances. In this phase, the
auditor performs analytical procedures to assess the overall reasonableness of transactions
and balances. In addition, tests of details of balances are performed to test for monetary
misstatements in the financial statements.
Phase IV: Complete the audit and issue an audit report. In the last phase of the audit, the
information obtained in the previous phases is combined to reach an overall conclusion as
to whether the financial statements are fairly presented. An audit report is then issued
based on this conclusion.
84.
challenging
Discuss some precautionary actions an auditor should take when there is a moderate or high risk
of management fraud.
Answer:
Some precautionary actions an auditor should take when there is a moderate or high risk of
management fraud include:
Critically challenging the clients choice of accounting principles.
Assigning more experienced personnel to the engagement.
Doing more audit work at year-end instead of at interim dates.
Closely supervising assistants and other inexperienced staff.
Performing additional or more effective audit procedures.
In extreme situations, the auditor should consider withdrawing from the engagement.
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Match seven of the terms (a-k) with the definitions provided below (1-7):
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
1.
2.
A set of six audit objectives the auditor must meet, including timing, posting and
summarization, and accuracy.
3.
4.
5.
A set of nine audit objectives the auditor must meet, including completeness,
detail tie-in, and rights and obligations.
6.
7.
86.
challenging
Below are five audit procedures, all of which are tests of transactions associated with the audit of
the sales and collection cycle. Also below are the six general transaction-related audit objectives
and the five management assertions. For each audit procedure, indicate (1) its audit objective, and
(2) the management assertion being tested.
A.
B.
C.
D.
E.
F.
Arens/Elder/Beasley
Audit Objectives
Occurrence
Completeness
Accuracy
Posting and summarization
Classification
Timing
V.
W.
X.
Y.
Z.
Assertions
Occurrence
Completeness
Accuracy
Classification
Cutoff
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1.
A
V
F
Z
2.
Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in
recording sales transactions.
(1)
.
(2)
.
3.
B
W
B, C
W, X
Account for the sequence of prenumbered bills of lading and sales invoices.
(1)
.
(2)
.
4.
Trace from a sample of prelistings of cash receipts to the cash receipts journal, testing for
names, amounts, and dates.
(1)
.
(2)
.
5.
A
V
87.
challenging
Vouch recorded sales from the sales journal to the file of bills of lading.
(1)
.
(2)
.
Examine customer order forms for credit approval by the credit manager.
(1)
.
(2)
.
Below are five audit procedures, all of which are tests of transactions associated with the audit of
the acquisition and payment cycle. Also below are the six general transaction-related audit
objectives and the five management assertions. For each audit procedure, indicate (1) its audit
objective, and (2) the management assertion being tested.
A.
B.
C.
D.
E.
F.
Audit Objectives
Occurrence
Completeness
Accuracy
Posting and summarization
Classification
Timing
Assertions
V.
Occurrence
W.
Completeness
X.
Accuracy
Y.
Classification
Z.
Cutoff
1.
Foot the purchases journal and trace the totals to the related general ledger accounts.
(1)
.
(2)
.
2.
3.
4.
D
X
C
X
F
Z
B
W
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A
V
88.
challenging
5.
Examine supporting documentation for a sample of transactions for authorized payee and
amount and to determine services or goods were received.
(1)
.
(2)
.
Below are five audit procedures, all of which are tests of balances associated with the audit of
accounts receivable. Also below are the eight general balance-related audit objectives and the four
management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the
management assertion being tested.
A.
B.
C.
D.
E.
F.
G.
H.
Audit Objectives
Existence
Completeness
Accuracy
Classification
Cutoff
Detail tie-in
Realizable value
Rights and obligations
Assertions
V.
Existence
W.
Completeness
X.
Valuation and allocation
Y.
Rights and obligations
F
X
1.
Obtain an aged listing of accounts receivable. For a sample of individual customers on the
listing, agree the customers name, amount, and other information with the corresponding
information in the accounts receivable master file.
(1)
.
(2)
.
E
X
2.
Examine details of sales for five days before and five days after year-end to determine
whether sales have been recorded in the proper period.
(1)
.
(2)
.
3.
Assess the reasonableness of the balance in the allowance for doubtful accounts.
(1)
.
(2)
.
4.
Inquire as to whether any accounts receivable have been factored or sold during the period.
(1)
.
(2)
.
5.
G
X
H
Y
D
X
89.
easy
b
Responsibility for the fair presentation of financial statements rests equally with management and
the auditor.
a.
True
b.
False
90.
easy
b
Errors are usually more difficult for an auditor to detect than frauds.
a.
True
b.
False
Arens/Elder/Beasley
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91.
easy
b
Auditors have found that the most efficient way to conduct audits is to focus primarily on testing
classes of transactions and performing minimal or no tests of ending account balances.
a.
True
b.
False
92.
easy
a
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.
a.
True
b.
False
93.
easy
b
Tests of details of balances typically involve the use of comparisons and relationships to assess the
overall reasonableness of account balances.
a.
True
b.
False
94.
easy
a
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 indirect-effect illegal acts unless there is reason to believe they may exist.
a.
True
b.
False
95.
easy
a
When an auditor believes that an illegal act may have occurred, the first step he or she should take
is to inquire of management at a level above those likely to be involved in the potential illegal act.
a.
True
b.
False
96.
medium
b
Audits are expected to provide a higher degree of assurance for the detection of material frauds than
is provided for an equally material error.
a.
True
b.
False
97.
medium
a
Auditors have a higher degree of responsibility for detecting direct-effect illegal acts than indirecteffect illegal acts.
a.
True
b.
False
98.
medium
b
The auditors first course of action when an illegal act is uncovered should be to immediately notify
the appropriate authorities, including but not limited to the police, and for publicly held companies,
the Securities and Exchange Commission.
a.
True
b.
False
99.
medium
b
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.
a.
True
b.
False
100.
medium
b
General transaction-related audit objectives vary from audit to audit, depending on the nature and
characteristics of the clients business and industry.
a.
True
b.
False
Arens/Elder/Beasley
To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
101.
medium
a
The audit objective of posting and summarization is associated with the management assertion of
accuracy.
a.
True
b.
False
102.
medium
b
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.
a.
True
b.
False
103.
medium
a
104.
medium
a
The effect of a violation of the existence transaction-related audit objective for the sales account
would be an overstatement of that account.
a.
True
b.
False
105.
medium
b
The effect of a violation of the completeness transaction-related audit objective for cash
disbursements transactions would be an overstatement of cash disbursements.
a.
True
b.
False
106.
medium
b
The transaction-related audit objective that deals with whether recorded transactions have actually
occurred is the completeness objective.
a.
True
b.
False
107.
medium
a
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.
a.
True
b.
False
108.
medium
a
The cutoff objective, transactions near the balance sheet date are recorded in the proper period, is
a balance-related audit objective.
a.
True
b.
False
109.
medium
b
For a private company audit, tests of controls are normally performed only on those internal
controls the auditor believes have not been operating effectively during the period under audit.
a.
True
b.
False
110.
medium
a
An audit generally provides no assurance that indirect-effect illegal acts will be detected.
a.
True
b.
False
111.
medium
a
When an auditor believes there is a moderate or high risk of management fraud, the auditor will
normally do less audit work at interim dates instead of at year-end.
a.
True
b.
False
Arens/Elder/Beasley
To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
112.
challenging
b
An auditor must inform a clients audit committee of an illegal act discovered during an audit in
writing.
a.
True
b.
False
113.
challenging
b
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 companys financial
position and results of operations.
a.
True
b.
False
114.
challenging
a
The auditors responsibility for uncovering direct-effect illegal acts is the same as for fraud.
a.
True
b.
False
Arens/Elder/Beasley