Ch 6 Auditing

Front 1

The objective of the ordinary audit of financial statements is the expression of an opinion on:
A) the fairness of the financial statements in all material respects.
B) the accuracy of the financial statements.
C) the accuracy of the annual report.
D) the accuracy of the balance sheet and income statement.

Back 1

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

Front 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:
A) should withdraw from the engagement.
B) should request an increase in audit fees so that more resources can be used to conduct the audit.
C) has the responsibility of notifying financial statement users through the auditor's report.
D) should notify regulators of the circumstances.

Back 2

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

Front 3

Auditors accumulate evidence to:
A) defend themselves in the event of a lawsuit.
B) justify the conclusions they have otherwise reached.
C) satisfy the requirements of the Securities Acts of 1933 and 1934.
D) enable them to reach conclusions about the fairness of the financial statements.

Back 3

D) enable them to reach conclusions about the fairness of the financial statements.

Front 4

The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the:
A) board of directors.
B) company management.
C) financial statement auditor.
D) company's internal audit department.

Back 4

B) company management.

Front 5

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.

Back 5

C) the Securities Exchange Act of 1934.

Front 6

Which of the following statements is true of a public company's financial statements?
A) Sarbanes-Oxley requires the CEO only to certify the financial statements.
B) Sarbanes-Oxley requires the CFO only to certify the financial statements.
C) Sarbanes-Oxley requires the CEO and CFO to certify the financial statements.
D) Sarbanes-Oxley neither requires the CEO nor the CFO to certify the financial statements.

Back 6

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

Front 7

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.

Back 7

B) management.

Front 8

Responsibility for the fair presentation of financial statements rests equally with management and the auditor.
A) True
B) False

Back 8

B) False

Front 9

The auditor's best defense when material misstatements are not uncovered is to have conducted the audit:
A) in accordance with generally accepted auditing standards.
B) as effectively as reasonably possible.
C) in a timely manner.
D) only after an adequate investigation of the management team.

Back 9

A) in accordance with generally accepted auditing standards.

Front 10

In order to provide reasonable assurance the audit must be performed with an attitude of professional skepticism. Which of the following is most correct regarding the "attitude" of professional skepticism?
A) auditors should assume that management is dishonest
B) auditors should assume that management is neither dishonest nor honest
C) auditors should assume that management is honest and mistakes are unintentional
D) auditors should assume that management is incumbent in preparing financial statements

Back 10

B) auditors should assume that management is neither dishonest nor honest

Front 11

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.

Back 11

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

Front 12

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.

Back 12

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

Front 13

When an auditor believes that an illegal act may have occurred, the auditor should first:
A) inquire of management at a level above those likely to be involved.
B) consult with legal counsel of others knowledgeable about the illegal acts.
C) accumulate additional evidence.
D) withdraw from the engagement.

Back 13

A) inquire of management at a level above those likely to be involved.

Front 14

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) important to the financial statements
B) statistically significant to the financial statements
C) material to the financial statements
D) identified by the client

Back 14

C) material to the financial statements

Front 15

Fraudulent financial reporting is most likely to be committed by whom?
A) line employees of the company
B) outside members of the company's board of directors
C) company management
D) the company's auditors

Back 15

C) company management

Front 16

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

Back 16

C) violation of federal income tax laws

Front 17

The concept of reasonable assurance indicates that the auditor is:
A) not a guarantor of the correctness of the financial statements.
B) not responsible for the fairness of the financial statements.
C) responsible only for issuing an opinion on the financial statements.
D) responsible for finding all misstatements.

Back 17

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

Front 18

Which of the following is the auditor least likely to do when aware of an illegal act?
A) Discuss the matter with the client's legal counsel.
B) Obtain evidence about the potential effect of the illegal act on the financial statements.
C) Contact the local law enforcement officials regarding potential criminal wrongdoing.
D) Consider the impact of the illegal act on the relationship with the company's management.

Back 18

C) Contact the local law enforcement officials regarding potential criminal wrongdoing.

Front 19

Auditing standards require that an audit be designed to provide reasonable assurance of detecting:
A) material errors in the financial statements.
B) fraud in the financial statements.
C) material errors and fraud in the financial statements.
D) inadequate disclosure in the notes to the financial statements

Back 19

A) material errors in the financial statements.

Front 20

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:
A) provide reasonable assurance that material misstatements will be detected.
B) be a guarantor of the fairness in the statements.
C) be equally responsible with management for the preparation of the financial statements.
D) be an insurer of the fairness in the statements.

Back 20

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

Front 21

"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 AICPA's Code of Professional Conduct.

Back 21

B) an attitude of professional skepticism.

Front 22

If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct:
A) bankruptcies could no longer occur.
B) bankruptcies would be reduced to a very small number.
C) audits would be much easier to complete.
D) audits would not be economically practical.

Back 22

D) audits would not be economically practical.

Front 23

The auditor's 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 auditing standards.
B) the financial statements are the client's responsibility.
C) the client is guilty of contributory negligence.
D) the client is guilty of fraudulent misrepresentation.

Back 23

A) the audit was conducted in accordance with auditing standards.

Front 24

Which of the following is most correct with regard to the auditor's search of indirect-effect illegal acts that may have been committed by the client?
A) No reason to search unless there is sufficient evidence to believe they have occurred.
B) Same audit responsibility as the search for financial statement fraud.
C) Same audit responsibility as the search for misappropriated assets.
D) No reason to search as they would have an indirect effect on the financial statements.

Back 24

A) No reason to search unless there is sufficient evidence to believe they have occurred.

Front 25

Which of the following statements is usually true?
A) It is easier for the auditor to uncover fraud than errors.
B) It is easier for the auditor to uncover indirect-effect illegal acts than fraud.
C) The auditor's responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.
D) The auditor's responsibility for detecting indirect-effect illegal acts is similar to the responsibility to detect fraud.

Back 25

C) The auditor's responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.

Front 26

Which is the following is most correct regarding the distinction(s) between the auditor's responsibilities for searching for errors and fraud.
A) little
B) a significant
C) no
D) various

Back 26

C) no

Front 27

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is:
A) greater for management fraud because managers are inherently more deceptive than employees.
B) greater for management fraud because of management's ability to override existing internal controls.
C) greater for employee fraud because of the higher crime rate among blue collar workers.
D) greater for employee fraud because of the larger number of employees in the organization.

Back 27

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

Front 28

Which of the following statements is correct with respect to the auditor's 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.

Back 28

A) The auditor has no responsibility for searching for indirect-effect illegal acts.

Front 29

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility:
A) more on discovering errors than employee fraud.
B) more on discovering employee fraud than errors.
C) equally on discovering either one.
D) on the senior auditor for detecting errors and on the manager for detecting employee fraud.

Back 29

C) equally on discovering either one.

Front 30

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.

Back 30

A) very low.

Front 31

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.

Back 31

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

Front 32

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.

Back 32

C) consider accumulating additional evidence to determine if there is actually an illegal act.

Front 33

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.

Back 33

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

Front 34

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.

Back 34

C) the Securities and Exchange Commission.

Front 35

If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely detect?
A) unrecorded transactions
B) errors in postings of recorded transactions
C) counterfeit signatures on paid checks
D) fraud involving collusion

Back 35

B) errors in postings of recorded transactions

Front 36

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?
A) Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization.
B) Generally, the auditor is under an obligation to inform the PCAOB.
C) Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.
D) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

Back 36

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

Front 37

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?
A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.
B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud
C) The auditor may 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.

Back 37

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

Front 38

The essence of the attest function is to:
A) assure the consistent application of correct accounting procedures.
B) determine whether the client's financial statements are fairly stated in accordance with an applicable financial reporting framework such as U.S. GAAP or IFRS.
C) examine individual transactions so that the auditor may certify as to their validity.
D) detect collusion and fraud.

Back 38

B) determine whether the client's financial statements are fairly stated in accordance with an applicable financial reporting framework such as U.S. GAAP or IFRS.

Front 39

The auditor's 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 entity's internal control.
D) the assessment of whether to accept the audit engagement.

Back 39

C) understanding the entity's internal control.

Front 40

Illegal acts are defined in auditing standards as:
A) violations of laws or government regulations.
B) violations of laws or government regulations other than errors.
C) violations of laws or government regulations other than fraud.
D) violations of law which would result in the arrest of the perpetrator

Back 40

C) violations of laws or government regulations other than fraud.

Front 41

Most illegal acts affect the financial statements:
A) directly.
B) only indirectly.
C) both directly and indirectly.
D) materially if direct; immaterially if indirect.

Back 41

B) only indirectly.

Front 42

With respect to the detection of indirect- effect 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.

Back 42

A) no assurance that they will be detected.

Front 43

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

Back 43

False

Front 44

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.T/F

Back 44

true

Front 45

Why does the auditor divide the financial statements into smaller segments?
A) Using the cycle approach makes the audit more manageable.
B) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces.
C) The cycle approach is used because auditing standards require it.
D) All of the above are correct.

Back 45

A) Using the cycle approach makes the audit more manageable

Front 46

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.

Back 46

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

Front 47

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.

Back 47

A) cash account.

Front 48

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.

Back 48

C) both A and B are correct.

Front 49

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.

Back 49

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

Front 50

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

Back 50

C) general journal

Front 51

Which of the following is not one of the three categories of assertions?
A) Assertions about classes of transactions and events for the period under audit
B) Assertions about financial statements and correspondence to GAAP
C) Assertions about account balances at period end
D) Assertions about presentation and disclosure

Back 51

B) Assertions about financial statements and correspondence to GAAP

Front 52

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.

Back 52

D) classification and understandability assertion.

Front 53

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?
A) Assertions about classes of transactions for the period under audit
B) Assertions about account balances at period end
C) Assertions about the quality of source documents used to prepare the financial statements
D) Assertions about presentation and disclosure

Back 53

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

Front 54

Management assertions are:
A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS
B) stated in the footnotes to the financial statements.
C) explicitly expressed representations about the financial statements.
D) provided to the auditor in the assertions letter, but are not disclosed on the financial statements.

Back 54

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

Front 55

Which of the following statements is true?
A) Auditors have generally found that the most effective and efficient way to conduct an audit is to obtain some assurance for each class of transaction and for the ending balance of the related account.
B) Management's assertions follow and are closely related to the audit objectives.
C) The auditor's primary responsibility is to find and disclose fraudulent management assertions.
D) Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts.

Back 55

A) Auditors have generally found that the most effective and efficient way to conduct an audit is to obtain some assurance for each class of transaction and for the ending balance of the related account.

Front 56

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.

Back 56

C) Existence deals with understatements and completeness deals with overstatements.

Front 57

Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"?
A) occurrence
B) completeness
C) rights and obligations
D) existence

Back 57

B) completeness

Front 58

Which of the following management assertions is not associated with transaction-related audit objectives?
A) Occurrence
B) Classification and understandability
C) Accuracy
D) Completeness

Back 58

B) Classification and understandability

Front 59

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.

Back 59

B) The general audit objectives are applicable to every account balance on the financial statements.

Front 60

The auditor is determining that the recorded sales are for the amount of goods shipped are correctly billed and recorded. She is gathering evidence about which transaction related audit objective?
A) existence
B) completeness
C) accuracy
D) cut-off

Back 60

C) accuracy

Front 61

Which of the following combinations is correct?
A) Existence relates to whether the amounts in accounts are understated.
B) Occurrence relates to whether balances exist.
C) Existence relates to whether amounts included exist.
D) Occurrence relates to whether the amounts in accounts occurred in the proper year.

Back 61

C) Existence relates to whether amounts included exist.

Front 62

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.

Back 62

A) There should be at least one specific objective for each relevant general objective.

Front 63

) In testing for cutoff, the objective is to determine:
A) whether all of the current period's transactions are recorded.
B) whether transactions are recorded in the correct accounting period.
C) the proper cutoff between capitalizing and expensing expenditures.
D) the proper cutoff between disclosing items in footnotes or in account balances.

Back 63

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

Front 64

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.

Back 64

B) are properly disclosed in accordance with GAAP.

Front 65

The detail tie-in is part of the ________ assertion for account balances.
A) classification
B) valuation and allocation
C) rights and obligations
D) completeness

Back 65

B) valuation and allocation

Front 66

The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of:
A) transactions.
B) balances.
C) costs.
D) cutoffs.

Back 66

A) transactions.

Front 67

Which of the following best describes tests of details of balances?
A) audit procedures designed to test for monetary misstatements in the accounts summarized in the financial statements
B) audit procedures designed to test for the monetary amounts of transactions
C) audit procedures designed to test for reasonableness of account balances
D) audit procedures designed to test for effectiveness in recording accounting information

Back 67

A) audit procedures designed to test for monetary misstatements in the accounts summarized in the financial statements

Front 68

Which of the following statements is not true?
A) Balance-related audit objectives are applied to ending account balances.
B) Transaction-related audit objectives are applied to classes of transactions.
C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts.
D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts.

Back 68

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

Front 69

Tests of details of balances are specific audit procedures that are intended to:
A) test for monetary errors in the financial statements.
B) prove 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.

Back 69

A) test for monetary errors in the financial statements.

Front 70

Which of the following statements is not correct?
A) There are many ways an auditor can accumulate evidence to meet overall audit objectives.
B) Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility.
C) It is appropriate to minimize the cost of accumulating evidence.
D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects.

Back 70

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

Front 71

If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor:
A) can issue an unqualified opinion.
B) can significantly reduce other substantive tests.
C) can write the engagement letter.
D) needs to perform additional tests of controls so that the assurance level can be increased.

Back 71

B) can significantly reduce other substantive tests.

Front 72

After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on:
A) generally accepted auditing standards.
B) the AICPA's Code of Professional Conduct.
C) generally accepted accounting principles.
D) the auditor's professional judgment.

Back 72

D) the auditor's professional judgment.

Front 73

List the four phases of a Financial Statement Audit

Back 73

1. Plan and design an audit approach
2. Perform tests of controls and substantive tests of transactions
3. Perform analytical procedures and tests of details of balances
4. Complete the audit and issue the report