Question 1

Which of the following is correct concerning the PCAOB's concept of a significant account?

Accepted Answer

A) It is the same as a relevant assertion. 
B) The auditor need only consider significant accounts when controls do not operate effectively. 
C) In deciding whether an account is a significant account one does not consider the effect of internal control. 
D) It is an account for which qualitative materiality considerations are particularly important. 
A) It is the same as a relevant assertion. 
B) The auditor need only consider significant accounts when controls do not operate effectively. 
C) In deciding whether an account is a significant account one does not consider the effect of internal control. 
D) It is an account for which qualitative materiality considerations are particularly important.

Question 2

Which of the following matters is generally included in an auditor's engagement letter?

Accepted Answer

A) Limitations of the engagement. 
B) Factors to be considered in establishing preliminary judgments about materiality. 
C) Management's liability for all illegal acts committed by its employees. 
D) The auditor's responsibility to obtain negative assurance relating to non-compliance with laws and regulations. 
A) Limitations of the engagement. 
B) Factors to be considered in establishing preliminary judgments about materiality. 
C) Management's liability for all illegal acts committed by its employees. 
D) The auditor's responsibility to obtain negative assurance relating to non-compliance with laws and regulations.

Question 3

The auditor faces a risk that the audit will not detect material misstatements in the financial statements.In regard to minimizing this risk,the auditor primarily relies on:

Accepted Answer

A) Substantive procedures. 
B) Tests of controls. 
C) Internal control. 
D) Statistical analysis. 
A) Substantive procedures. 
B) Tests of controls. 
C) Internal control. 
D) Statistical analysis.

Question 4

Which of the following is an example of fraudulent financial reporting?

Accepted Answer

A) Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. 
B) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. 
C) An employee steals inventor and the "shrinkage" is recorded in cost of goods sold. 
D) An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. 
A) Company management falsifies inventory count tags thereby overstating ending inventory and understating cost of goods sold. 
B) An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. 
C) An employee steals inventor and the "shrinkage" is recorded in cost of goods sold. 
D) An employee "borrows" tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Question 5

To test for unsupported entries in the journals,the direction of audit testing should be to the:

Accepted Answer

A) Ledger entries. 
B) Journal entries. 
C) Original source documents. 
D) Financial statements. 
A) Ledger entries. 
B) Journal entries. 
C) Original source documents. 
D) Financial statements.

Question 6

Preliminary arrangements with clients should be set forth in the management letter.

Accepted Answer

A) True 
 B)False

Question 7

Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company.

Accepted Answer

A) True 
 B)False

Question 8

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?

Accepted Answer

A) A material amount would significantly alter the "total mix" of information made available to an investor. 
B) Materiality cannot be used as a basis for interpreting federal securities laws. 
C) A material amount is that at which an individual's decision would be changed. 
D) Materiality is composed of quantitative and not qualitative aspects. 
A) A material amount would significantly alter the "total mix" of information made available to an investor. 
B) Materiality cannot be used as a basis for interpreting federal securities laws. 
C) A material amount is that at which an individual's decision would be changed. 
D) Materiality is composed of quantitative and not qualitative aspects.

Question 9

Which of the following statements is correct regarding the auditor's determination of materiality?

Accepted Answer

A) The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. 
B) The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. 
C) Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. 
D) The amount used for the planning should equal that used for evaluation. 
A) The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement. 
B) The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts. 
C) Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality. 
D) The amount used for the planning should equal that used for evaluation.

Question 10

Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.

Accepted Answer

A) True 
 B)False

Question 11

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

Accepted Answer

A) Account risk. 
B) Control risk. 
C) Detection risk. 
D) Inherent risk. 
A) Account risk. 
B) Control risk. 
C) Detection risk. 
D) Inherent risk.

Question 12

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?

Accepted Answer

A) Completeness. 
B) Rights and obligations. 
C) Legality. 
D) Valuation. 
A) Completeness. 
B) Rights and obligations. 
C) Legality. 
D) Valuation.

Question 13

When a company has changed auditors,according to the Professional Standards:

Accepted Answer

A) The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. 
B) The predecessor must always respond fully to all inquiries made by the successor auditor. 
C) The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. 
D) The successor may choose not to attempt any communication with the predecessor auditor. 
A) The successor auditor has the responsibility to initiate contact with the predecessor auditor to ask about the client before the engagement is accepted; the predecessor has no responsibility to initiate this contact, even when aware of matters bearing on the integrity of management. 
B) The predecessor must always respond fully to all inquiries made by the successor auditor. 
C) The successor must discuss with the predecessor matters bearing on the engagement prior to accepting the engagement. 
D) The successor may choose not to attempt any communication with the predecessor auditor.

Question 14

The risk of a material misstatement occurring in an account,assuming an absence of internal control,is referred to as:

Accepted Answer

A) Account risk. 
B) Control risk. 
C) Detection risk. 
D) Inherent risk. 
A) Account risk. 
B) Control risk. 
C) Detection risk. 
D) Inherent risk.

Question 15

With respect to the auditor's planning of a year-end audit,which of the following statements is always true?

Accepted Answer

A) An engagement should not be accepted after the fiscal year-end. 
B) An inventory count must be observed at the balance sheet date. 
C) The client's audit committee should not be told of any specific audit procedures which will be performed. 
D) It is an acceptable practice to carry out parts of the examination at interim dates. 
A) An engagement should not be accepted after the fiscal year-end. 
B) An inventory count must be observed at the balance sheet date. 
C) The client's audit committee should not be told of any specific audit procedures which will be performed. 
D) It is an acceptable practice to carry out parts of the examination at interim dates.

Question 16

If the business environment is experiencing a recession,the auditor most likely would focus increased attention on which of the following accounts?

Accepted Answer

A) Purchase returns and allowances. 
B) Allowance for doubtful accounts. 
C) Common stock. 
D) Noncontrolling interest of a subsidiary purchased during the year. 
A) Purchase returns and allowances. 
B) Allowance for doubtful accounts. 
C) Common stock. 
D) Noncontrolling interest of a subsidiary purchased during the year.

Question 17

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

Accepted Answer

A) Only use certified public accountants on the engagement. 
B) Place increased emphasis on the audit of objective transactions rather than subjective transactions. 
C) Supervise members of the audit team less closely and rely more upon judgment. 
D) Use less predictable audit procedures. 
A) Only use certified public accountants on the engagement. 
B) Place increased emphasis on the audit of objective transactions rather than subjective transactions. 
C) Supervise members of the audit team less closely and rely more upon judgment. 
D) Use less predictable audit procedures.

Question 19

The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?

Accepted Answer

A) Inability to generate positive cash flows from operations, while reporting large increases in earnings. 
B) Management's lack of interest in increasing the dividend paid on common stock. 
C) Large amounts of liquid assets that are easily convertible into cash. 
D) Inability to borrow necessary capital without obtaining waivers on debt covenants. 
A) Inability to generate positive cash flows from operations, while reporting large increases in earnings. 
B) Management's lack of interest in increasing the dividend paid on common stock. 
C) Large amounts of liquid assets that are easily convertible into cash. 
D) Inability to borrow necessary capital without obtaining waivers on debt covenants.

Exam 6: Audit Planning, understanding the Client, assessing Risks, and Responding

Which of the following is correct concerning the PCAOB's concept of a significant account?

Which of the following matters is generally included in an auditor's engagement letter?

The auditor faces a risk that the audit will not detect material misstatements in the financial statements.In regard to minimizing this risk,the auditor primarily relies on:

Which of the following is an example of fraudulent financial reporting?

To test for unsupported entries in the journals,the direction of audit testing should be to the:

Preliminary arrangements with clients should be set forth in the management letter.

Audit committees should be made up of the most qualified directors regardless of whether they are part of management of the company.

PCAOB standards suggest which of the following when interpreting the federal securities laws relating to materiality?

Which of the following statements is correct regarding the auditor's determination of materiality?

Analytical procedures are seldom used during the risk assessment stage of an audit engagement because they are substantive procedures.

The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:

Which of the following is not an assertion that is made in the financial statements by management concerning each major account balance?

When a company has changed auditors,according to the Professional Standards:

The risk of a material misstatement occurring in an account,assuming an absence of internal control,is referred to as:

With respect to the auditor's planning of a year-end audit,which of the following statements is always true?

If the business environment is experiencing a recession,the auditor most likely would focus increased attention on which of the following accounts?

The completeness of recording of assets is generally verified by tracing from the source documents to the recorded entry.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

The auditors' tests of controls are designed to substantiate the fairness of specific financial statement accounts.

Which of the following would heighten an auditor's concern about the risk of fraudulent financial reporting?

The Role of the Public Accountant in the American Economy

Professional Standards

Professional Ethics

Legal Liability of CPAS

Audit Evidence and Documentation

Internal Control

Consideration of Internal Control in an Information Technology Environment

Audit Sampling

Cash and Financial Investments

Accounts Receivable, Notes Receivable, and Revenue

Inventories and Cost of Goods Sold

Property Plant and Equipment: Depreciation and Depletion

Accounts Payable and Other Liabilities

Debt and Equity Capital

Auditing Operations and Completing the Audit

Auditors Report

Integrated Audits of Public Companies

Additional Assurance Services: Historical Financial Information

Additional Assurance Services: Other Information

Internal, Operational, and Compliance Auditing

Probability-Proportion-To-Size Sampling

Filters