Professional Documents
Culture Documents
Audit CH 6 and 7
Audit CH 6 and 7
Answer: A
2) If the auditor believes that the financial statements are not fairly stated or is unable to
reach a conclusion because of insufficient evidence, the auditor
Answer: C
3) Auditors accumulate evidence to
Answer: D
4) Which of the following is not one of the steps used to develop audit objectives?
Answer: A
6.2 Learning Objective 6-2
1) The responsibility for adopting sound accounting policies and maintaining adequate
internal control rests with the
1. A) board of directors.
2. B) company management.
3. C) financial statement auditor.
4. D) company’s internal audit department.
Answer: B
2) If management insists on financial statement disclosures that the auditor finds
unacceptable, the auditor can withdraw from the engagement or
1. A)
Issue a qualified opinion Issue an adverse opinion
Yes Yes
1. B)
Issue an adverse opinion Issue a qualified opinion
No No
1. C)
Issue an adverse opinion Issue a qualified opinion
Yes No
1. D)
Issue an adverse opinion Issue a qualified opinion
No Yes
Answer: A
3) In certifying their annual financial statements, the CEO and CFO of a public company
certify that the financial statements comply with the requirements of
1. A) GAAP.
2. B) the Sarbanes-Oxley Act.
3. C) the Securities Exchange Act of 1934.
4. D) GAAS.
Answer: C
4) Which of the following statements is true of a public company’s financial statements?
Answer: C
5) The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to
1. A) the auditor.
2. B) management.
3. C) both management and the auditor equally.
4. D) management for the statements and the auditor for the notes.
Answer: B
6.3 Learning Objective 6-3
1) The auditor’s best defense when material misstatements are not uncovered is to have
conducted the audit
Answer: A
2) Which of the following is not one of the reasons that auditors provide
only reasonable assurance on the financial statements?
1. A) The auditor commonly examines a sample, rather than the entire population of
transactions.
2. B) Accounting presentations contain complex estimates which involve uncertainty.
3. C) Fraudulently prepared financial statements are often difficult to detect.
4. D) Auditors believe that reasonable assurance is sufficient in the vast majority of
cases.
Answer: D
3) Which of the following statements is the most correct regarding errors and fraud?
Answer: A
4) When an auditor believes that an illegal act may have occurred, the auditor should first
Answer: A
5) The auditor has no responsibility to plan and perform the audit to obtain reasonable
assurance that misstatements that are not ________ are detected.
Answer: C
6) Fraudulent financial reporting is most likely to be committed by whom?
Answer: C
7) Which of the following would most likely be deemed a direct effect illegal act?
Answer: C
8) The concept of reasonable assurance indicates that the auditor is
Answer: A
9) Which of the following is the auditor least likely to do when aware of an illegal act?
Answer: C
10) An auditor discovers that the company’s bookkeeper unintentionally made an mistake
in calculating the amount of the quarterly sales. This is an example of
1. A) employee fraud.
2. B) an error.
3. C) misappropriation of assets.
4. D) a defalcation.
Answer: B
11) An auditor has a duty to
Answer: A
12) If the auditor were responsible for making certain that all of management’s assertions
in the financial statements were absolutely correct,
Answer: D
13) When dealing with laws and regulations that do not have a direct effect on the
financial statements, the auditor
Answer: A
14) Which of the following statements is usually true?
Answer: D
15) Auditing standards make ________ distinction(s) between the auditor’s responsibilities
for searching for errors and fraud.
1. A) little
2. B) a significant
3. C) no
4. D) various
Answer: C
16) In comparing management fraud with employee fraud, the auditor’s risk of failing to
discover the fraud is
1. A) greater for management fraud because managers are inherently more deceptive
than employees.
2. B) greater for management fraud because of management’s ability to override
existing internal controls.
3. C) greater for employee fraud because of the higher crime rate among blue collar
workers.
4. D) greater for employee fraud because of the larger number of employees in the
organization.
Answer: B
17) Misappropriation of assets
Answer: C
18) When comparing the auditor’s responsibility for detecting employee fraud and for
detecting errors, the profession has placed the responsibility
Answer: C
19) If there is collusion among management, the chance a normal audit would uncover
such acts is
1. A) very low.
2. B) very high.
3. C) zero.
4. D) none of the above.
Answer: A
20) When the auditor becomes aware of or suspects noncompliance with laws and
regulations
1. A) the auditor should evaluate the effects of the noncompliance on other aspects of
the audit.
2. B) the auditor should discuss the matter with management at a level above those
suspected of the noncompliance.
3. C) the auditor should obtain additional information to evaluate the possible effects
on the financial statements.
4. D) all of the above
Answer: D
21) When the auditor identifies or suspects noncompliance with laws and regulations, the
auditor
1. A) should discuss the matter with those whom they believe committed the illegal act.
2. B) begin communication with the FASB in accordance with PCAOB regulations.
3. C) may disclaim an opinion on the basis of scope limitations if he is precluded by
management from obtaining sufficient appropriate evidence.
4. D) should withdraw from the engagement.
Answer: C
22) When an auditor knows that an illegal act has occurred, she must
Answer: B
23) Which of the following is an accurate statement concerning the auditor’s responsibility
to consider laws and regulations?
1. A) Auditors can follow an easy, step-by-step procedure to determine how laws and
regulations impact the financial statements.
2. B) The auditor’s responsibility will depend on whether the laws or regulations are
expected to have a direct impact on the financial statements.
3. C) It is the responsibility of the auditor to determine if an act constitutes
noncompliance.
4. D) The auditor must inform an outside party if management has knowingly not
complied with a law or regulation.
Answer: B
24) Which of the following statements best describes the auditor’s responsibility with
respect to illegal acts that do not have a material effect on the client’s financial
statements?
1. A) Generally, the auditor is under no obligation to notify parties other than personnel
within the client’s organization.
2. B) Generally, the auditor is under an obligation to inform the PCAOB.
3. C) Generally, the auditor is obligated to disclose the relevant facts in the auditor’s
report.
4. D) Generally, the auditor is expected to compel the client to adhere to requirements
of the Foreign Corrupt Practices Act.
Answer: A
25) Which of the following statements best describes the auditor’s responsibility regarding
the detection of fraud?
1. 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.
2. B) The auditor is required to provide reasonable assurance that the financial
statements are free of both material errors and fraud.
3. C) The auditor is responsible for detecting material financial statement fraud, but not
a material misappropriation of assets.
4. D) The auditor is responsible for the failure to detect fraud only when an unqualified
opinion is issued.
Answer: B
26) When reporting identified or suspected noncompliance,
Answer: B
27) Another term for misappropriation of assets is
1. A) management fraud.
2. B) collusion.
3. C) employee fraud.
4. D) illegal acts.
Answer: C
28) The provisions of many laws and regulations affect the financial statements
1. A) directly.
2. B) only indirectly.
3. C) both directly and indirectly.
4. D) materially if direct; immaterially if indirect.
Answer: B
29) If a client has violated federal tax laws,
Answer: B
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 auditor’s responsibility for uncovering illegal acts that have a direct effect on the
financial statements is the same as for errors and fraud. However, the auditor is not
required to search for illegal acts that do not have a direct effect on the financial
statements unless there is reason to believe they exist.
Terms: Auditor responsibilities for discovering material errors, material fraud, direct-effect
illegal acts, and indirect-effect illegal acts
Diff: Challenging
Objective: LO 6-3
AACSB: Reflective thinking
34) Errors are usually more difficult for an auditor to detect than frauds.
Answer: FALSE
Terms: Auditor detection of errors and frauds
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking
6.4 Learning Objective 6-4
1) An audit must be performed with an attitude of professional skepticism. Professional
skepticism consists of two primary components: a questioning mind and
Answer: B
2) Which of the following is an accurate statement about professional skepticism?
Answer: A
3) One of the characteristics of professional skepticism is ________, which is the
conviction to decide for oneself, rather than accepting the claims of others.
1. A) interpersonal understanding
2. B) autonomy
3. C) suspension of judgment
4. D) self-esteem
Answer: B
4) A questioning mindset
1. A) means the auditor must prove every statement that management makes to them.
2. B) means the auditor should approach the audit with a “do not trust anyone” mental
outlook.
3. C) assures that the auditor will only accept honest clients.
4. D) means the auditor should approach the audit with a “trust but verify” mental
outlook.
Answer: D
5) One of the characteristics of professional skepticism is_______, which is a desire to
investigate beyond the obvious.
1. A) self-esteem
2. B) an interpersonal understanding
3. C) a search for knowledge
4. D) a questioning mindset
Answer: C
6) ________ is the self-confidence to resist persuasion and to challenge assumptions or
conclusions.
1. A) Self-esteem
2. B) Interpersonal understanding
3. C) Suspension of judgment
4. D) Autonomy
Answer: A
7) An auditor should recognize that the application of auditing procedures may produce
evidence indicating the possibility of errors of fraud and therefore should
Answer: A
6.5 Learning Objective 6-5
1) The starting point to effective professional judgment begins with
Answer: D
2) Which of the following is not a step in the professional judgment process?
Answer: C
3) ________ is the tendency to make assessments by starting from an initial value and
then adjusting insufficiently away from that initial value.
1. A) Anchoring
2. B) Availability
3. C) Overconfidence
4. D) Confirmation
Answer: A
4) When the auditor considers whether he understands the form and substance of the
transaction or event, and whether the relevant authoritative literature has been applied
consistently by the client, he is performing which step in the professional judgment
process?
Answer: B
5) When performing the review and completing the documentation and rationale for the
conclusion step of the professional judgment process, auditors will
Answer: B
6.6 Learning Objective 6-6
1) Why does the auditor divide the financial statements into smaller segments?
Answer: A
2) Why does the auditor divide the financial statements into segments around the financial
statement cycles?
Answer: B
3) The most important general ledger account included in and affecting several cycles is
the
1. A) cash account.
2. B) inventory account.
3. C) income tax expense and liability accounts.
4. D) retained earnings account.
Answer: A
4) 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
1. A) the transactions are related to financing a company rather than to its operations.
2. B) most capital acquisition and repayment cycle accounts involve few transactions,
but each is often highly material and therefore should be audited extensively.
3. C) Both A and B are correct.
4. D) Neither A nor B is correct.
Answer: C
5) In describing the cycle approach to segmenting an audit, which of the following
statements is not true?
1. A) All general ledger accounts and journals are included at least once.
2. B) Some journals and general ledger accounts are included in more than one cycle.
3. C) The “capital acquisition and repayment” cycle is closely related to the “acquisition
of goods and services and payment” cycle.
4. D) The “inventory and warehousing” cycle may be audited at any time during the
engagement since it is unrelated to the other cycles.
Answer: D
6) The cycle approach to auditing
1. A) ties to the way transactions are recorded in journals and then summarized in the
general ledger and financial statements.
2. B) cannot combine transactions recorded in different journals with the general
ledger balances that result from those transactions.
3. C) is the only way of segmenting an audit.
4. D) assumes that each account has two or more cycles associated with it.
Answer: A
7) Which balance sheet accounts are included in the payroll and personnel cycle?
Answer: C
6.7 Learning Objective 6-7
1) Auditors have found that generally the most efficient and effective way to conduct
audits is to
Answer: B
2) The term audit objective refers to all of the following except for
Answer: D
6.8 Learning Objective 6-8
1) Which of the following is not one of the AICPA categories of assertions?
1. A) assertions about classes of transactions and events for the period under audit
2. B) assertions about financial statements and correspondence to GAAP
3. C) assertions about account balances at period end
4. D) assertions about presentation and disclosure
Answer: B
2) If a short-term note payable is included in the accounts payable balance on the financial
statement, there is a violation of the
1. A) completeness assertion.
2. B) existence assertion.
3. C) cutoff assertion.
4. D) classification assertion.
Answer: D
3) International auditing standards and U.S. GAAP classify assertions into three
categories. Which of the following is not a category of assertions that management makes
about the accounting information in financial statements?
Answer: C
4) Management assertions are
1. A) directly related to the financial reporting framework used by the company, usually
U.S. GAAP or IFRS.
2. B) stated in the footnotes to the financial statements.
3. C) explicitly expressed representations about the financial statements.
4. D) provided to the auditor in the assertions letter, but are not disclosed on the
financial statements.
Answer: A
5) Management makes the following assertions about account balances:
Answer: C
6) Management’s disclosure of the amount of unfunded pension obligations and the
assumptions underlying these amounts is an example of the ________ assertion.
1. A) completeness
2. B) existence
3. C) accuracy and valuation
4. D) rights and obligations
Answer: C
7) Which of the following assertions is described as “this assertion addresses whether all
transactions that should be included in the financial statements are in fact included”?
1. A) occurrence
2. B) completeness
3. C) rights and obligations
4. D) existence
Answer: B
8) Which of the following management assertions is not associated with classes of
transactions and events?
1. A) occurrence
2. B) classification
3. C) accuracy
4. D) rights and obligations
Answer: D
9) With increases in the complexity of transactions and the need for expanded disclosures
about these transactions, assertions about the ________ have increased in importance.
1. A) existence
2. B) account balances
3. C) presentation and disclosure
4. D) classes of transactions
Answer: C
6.9 Learning Objective 6-9
1) Which of the following statements is true regarding the distinction between general
audit objectives and specific audit objectives for each class of transactions?
Answer: B
2) The auditor is determining that the correct selling price was used for billing and that the
quantity of goods shipped was the same as the quantity billed. She is gathering evidence
about which transaction-related audit objective?
1. A) existence
2. B) completeness
3. C) accuracy
4. D) cut-off
Answer: C
3) The posting and summarization audit objective is the auditor’s counterpart to
management’s assertion of
1. A) occurrence.
2. B) completeness.
3. C) accuracy.
4. D) classification.
Answer: C
4) ________ deals with potential overstatement and ________ deals with
understatements (unrecorded transactions).
1. A) Occurrence; completeness
2. B) Completeness; occurrence
3. C) Accuracy; classification
4. D) Classification; accuracy
Answer: A
6.10 Learning Objective 6-10
1) In testing for cutoff, the objective is to determine
Answer: B
2) The detail tie-in objective is not concerned that the details in the account balance
Answer: B
3) The detail tie-in is part of the ________ assertion for account balances.
1. A) classification
2. B) valuation and allocation
3. C) rights and obligations
4. D) completeness
Answer: B
4) The classification balance-related audit objective
Answer: A
5) Balance-related audit objectives
Answer: C
6) Which of the following statements is not true?
Answer: D
7) Determining that the footnote disclosures related to long-term debt are accurate is an
example of the ________ audit objective.
1. A) occurrence
2. B) completeness
3. C) presentation and disclosure
4. D) classification and understandability
Answer: C
6.11 Learning Objective 6-11
1) The procedures used to test the effectiveness of the internal controls are known as
1. A) tests of transactions.
2. B) tests of controls.
3. C) substantive analytical procedures.
4. D) control risk.
Answer: B
2) Which of the following statements is not correct?
1. A) There are many ways an auditor can accumulate evidence to meet overall audit
objectives.
2. B) Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility.
3. C) It is appropriate to minimize the cost of accumulating evidence.
4. D) Gathering evidence and minimizing costs are equally important considerations
that affect the approach the auditor selects.
Answer: D
3) Two overriding considerations affect the many ways an auditor can accumulate
evidence:
Answer: A
4) If the auditor has obtained a reasonable level of assurance about the fair presentation
of the financial statements through understanding internal control, assessing control risk,
testing controls, and analytical procedures, then the auditor
Answer: B
5) 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
Answer: D
6) Direct, written communication with the client’s customers to identify whether a
receivable exists is an example of a(n)
Answer: D
7) ________ are used as evidence to provide assurance about an account balance.
Answer: A
(Arens/Elder/Beasley)
Chapter 7 Audit Evidence
Answer: C
7.2 Learning Objective 7-2
1) Auditors must make decisions regarding what evidence to gather and how much to
accumulate. Which of the following is a decision that must be made by auditors related to
evidence?
1. A)
Sample size Timing of audit procedures
Yes Yes
1. B)
Sample size Timing of audit procedures
No No
1. C)
Sample size Timing of audit procedures
Yes No
1. D)
Sample size Timing of audit procedures
No Yes
Answer: A
2) When can audit procedures be performed?
1. A)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes Yes
1. B)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No No
1. C)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes No
1. D)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No Yes
Answer: A
3) A(n) ________ is the detailed instruction that explains the audit evidence to be obtained
during the audit.
1. A) audit objective
2. B) audit procedure
3. C) audit assertion
4. D) audit program
Answer: B
4) Which of the following is not one of the four decisions about what evidence to gather
and how much of it to accumulate?
Answer: B
5) When making audit evidence decisions,
1. A) the auditor decides which items in the population to test before determining the
sample size.
2. B) the sample size for any given procedure must remain constant from audit to
audit.
3. C) audit engagement software can assist the auditor in making evidence decisions.
4. D) the auditor is required to use the sample sizes that are determined by the
PCAOB.
Answer: C
7.3 Learning Objective 7-3
1) Audit evidence has two primary qualities for the auditor; relevance and reliability. Given
the choices below, which provides the auditor with the most reliable audit evidence?
Answer: B
2) Which of the following is not a characteristic of the reliability of evidence?
Answer: B
3) The auditor must gather sufficient and appropriate evidence during the course of the
audit. Sufficient evidence must
Answer: D
4) Audit evidence obtained directly by the auditor will not be reliable if
Answer: A
5) Appropriateness of evidence is a measure of the
1. A) quantity of evidence.
2. B) quality of evidence.
3. C) sufficiency of evidence.
4. D) meaning of evidence.
Answer: B
6) Which of the following statements regarding the relevance of evidence is correct?
Answer: A
7) Two determinants of the persuasiveness of evidence are
Answer: C
8) The two characteristics of the appropriateness of evidence are
Answer: C
9) Which of the following forms of evidence would be least persuasive in forming the
auditor’s opinion about marketable securities and other investments held by the company?
Answer: A
10) Which of the following statements is not correct?
1. A) It is possible to vary the sample size from one unit to 100% of the items in the
population.
2. B) Cost is an adequate justification for not gathering an adequate sample size.
3. C) The decision of how many items to test must be made by the auditor for each
audit procedure.
4. D) The sample size for any given procedure is likely to vary from audit to audit.
Answer: B
11) For audit evidence to be compelling to the auditor it must be sufficient and
appropriate. Which statement below is not correct regarding the appropriateness of audit
evidence?
1. A) The more effective the internal control system, the more assurance it provides
the auditor about the reliability of financial reporting by the client.
2. 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.
3. C) Evidence obtained from independent sources outside the entity is generally more
reliable than evidence secured solely within the entity.
4. D) The independent auditor’s direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.
Answer: B
12) Which of the following is a correct statement regarding audit evidence?
Answer: C
13) Which of the following is the most objective type of evidence?
Answer: B
14) Which items affect the sufficiency of evidence when choosing a sample?
1. A)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes Yes
1. B)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No No
1. C)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes No
1. D)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No Yes
Answer: C
15) Determine which of the following is most correct statement regarding the reliability of
audit evidence.
1. A) Information that is indirectly obtained from external sources is the most reliable
audit evidence.
2. B) Reliability of audit evidence is dependent upon the evidence being subjective.
3. C) Reliability of evidence refers to the amount of evidence obtained.
4. D) If internal controls are effective, evidence obtained is more reliable than when the
controls are not effective.
Answer: D
16) Evidence is generally considered appropriate when
Answer: C
17) Given the economic and time constraints in which auditors can collect evidence
regarding management assertions about the financial statements, the auditor normally
gathers evidence that is
1. A) irrefutable.
2. B) conclusive.
3. C) persuasive.
4. D) completely convincing.
Answer: C
18) Which of the following statements is not a correct statement regarding audit
evidence?
Answer: B
19) Evidence is usually more persuasive for balance sheet accounts when it is obtained
Answer: A
20) Which of the following statements is true?
Answer: C
21) Which of the following statements relating to the competence of evidential matter is
always true?
Answer: D