Accounting 408 Test 2 Review

1. An auditor obtains knowledge about a new client's business and its industry to
a. Make constructive suggestions concerning imrovements in t!e client's internal
control structure.
b. "evelo an attitude o# ro#essional sketicism concerning management's #inancial
statement assertions.
c. $valuate w!et!er t!e aggregation o# known misstatements causes t!e #inancial
statements taken as a w!ole to be materially misstated.
d. %nderstand t!e events and transactions t!at may !ave an e##ect on t!e client's
#inancial statements.
2. &rior to beginning t!e #ield work on a new audit engagement in w!ic! a '&A does not
ossess e(ertise in t!e industry in w!ic! t!e client oerates) t!e '&A s!ould
a. Reduce audit risk by lowering t!e reliminary levels o# materiality.
b. "esign secial substantive tests to comensate #or t!e lack o# industry e(ertise.
c. $ngage #inancial e(erts #amiliar wit! t!e nature o# t!e industry.
d. *btain a knowledge o# matters t!at relate to t!e nature o# t!e entity's business.
+. ,!ic! o# t!e #ollowing #actors most likely would cause an auditor not to accet a new
audit engagement-
a. An inade.uate understanding o# t!e entity's internal control structure.
b. T!e close ro(imity to t!e end o# t!e entity's #iscal year.
c. 'oncluding t!at t!e entity's management robably lacks integrity.
d. An inability to er#orm reliminary analytical rocedures be#ore assessing control
risk.
4. /e#ore acceting an engagement to audit a new client) an auditor is re.uired to
a. Make in.uiries o# t!e redecessor auditor a#ter obtaining t!e consent o# t!e
rosective client.
b. *btain t!e rosective client's signature to t!e engagement letter.
c. &reare a memorandum setting #ort! t!e sta##ing re.uirements and documenting
t!e reliminary audit lan.
d. "iscuss t!e management reresentation letter wit! t!e rosective client's audit
committee.
0. An auditor is lanning an audit engagement #or a new client in a business t!at is
un#amiliar to t!e auditor. ,!ic! o# t!e #ollowing is t!e least use#ul source o# in#ormation
#or t!e auditor during t!e reliminary lanning stage) w!en t!e auditor is trying to obtain
a general understanding o# audit roblems t!at mig!t be encountered-
a. Te(tbooks and eriodicals related to t!e industry.
b. A1'&A Audit and Accounting 2uides.
c. 3inancial statements o# ot!er entities in t!e industry.
d. Results o# er#orming substantive tests.
4. ,!ic! o# t!e #ollowing rocedures is an auditor least likely to er#orm in lanning a
#inancial statement audit-
a. 'oordinating t!e assistance o# entity ersonnel in data rearation.
b. "iscussing matters t!at may a##ect t!e audit wit! #irm ersonnel resonsible #or non5
audit services to t!e entity.
c. 6electing a samle o# vendors' invoices #or comarison wit! receiving reorts.
d. Reading t!e current year's interim #inancial statements.
7. ,!ic! o# t!e #ollowing is t!e correct order o# er#orming t!e stes A t!roug! ' below-
A 8 Test o# controls
/ 8 &rearation o# a #lowc!art documenting t!e understanding o# t!e client's
internal control structure
' 8 6ubstantive tests
a. A/'.
b. A'/.
c. /A'.
d. /'A.
8. T!e audit risk against w!ic! t!e auditor and t!ose w!o rely on !is9!er oinion re.uire
reasonable rotection is a combination o# t!ree searate risks at t!e account5balance or
class5o#5transactions level. T!e #irst risk is in!erent risk. T!e second risk is t!at
material errors or irregularities will not be revented or detected by t!e internal control
structure. T!e t!ird risk is t!at
a. T!e auditor will re:ect a correct account balance as incorrect.
b. Material errors or irregularities t!at occur will not be detected by t!e audit.
c. T!e auditor will aly an inaroriate audit rocedure.
d. T!e auditor will aly an inaroriate measure o# audit materiality.
;. 6ome account balances) suc! as t!ose #or ensions or leases) are t!e results o#
comle( calculations. T!e suscetibility to material misstatements in t!ese tyes o#
accounts is de#ined as
a. Audit risk.
b. "etection risk.
c. 6amling risk.
d. 1n!erent risk.
10. As t!e accetable level o# detection risk decreases) an auditor may c!ange t!e
a. Timing o# substantive tests by er#orming t!em at an interim date rat!er t!an at
year5end.
b. <ature o# substantive tests #rom a less e##ective to a more e##ective rocedure.
c. Timing o# tests o# controls by er#orming t!em at several dates rat!er t!an at one
time.
d. Assessed level o# in!erent risk to a !ig!er amount.
11. ,!ic! o# t!e #ollowing audit risk comonents may be assessed in non.uantitative
terms-
'ontrol "etection 1n!erent
Risk Risk Risk
a. =es =es =es
b. <o =es =es
c. =es =es <o
d. =es <o =es
12. Audit risk consists o# in!erent risk) control risk) and detection risk. ,!ic! o# t!e
#ollowing statements is true-
a. 'as! is more suscetible to t!e#t t!an an inventory o# coal because it !as a greater
in!erent risk.
b. T!e risk t!at material misstatement will not be revented or detected on a timely
basis by t!e internal control structure can be reduced to >ero by e##ective control
activities.
c. "etection risk is a #unction o# t!e e##iciency o# an auditing rocedure.
d. T!e e(isting levels o# in!erent risk) control risk) and detection risk can be c!anged
at t!e discretion o# t!e auditor.
1+. T!e accetable level o# detection risk is inversely related to t!e
a. Assurance rovided by substantive tests.
b. Risk o# misalying auditing rocedures.
c. &reliminary :udgment about materiality levels.
d. Risk o# #ailing to discover material misstatements.
14. According to A% +12 and A% +1;) t!e auditor uses t!e assessed level o# control risk
?toget!er wit! t!e assessed level o# in!erent risk@ to determine t!e accetable level o#
detection risk #or #inancial statement assertions. As t!e accetable level o# detection
risk decreases) t!e auditor may do one or more o# t!e #ollowing e(cet c!ange t!e
a. <ature o# substantive tests to more e##ective rocedures.
b. Timing o# substantive tests) suc! as er#orming t!em at year5end rat!er t!an at an
interim date.
c. $(tent o# substantive tests) suc! as using larger samle si>es.
d. Assurances rovided by substantive tests to a lower level.
10. T!e concet o# materiality wit! resect to t!e attest #unction
a. Alies only to ublicly !eld #irms.
b. Aas greater alication to t!e standards o# reorting t!an t!e ot!er generally
acceted auditing standards.
c. Re.uires t!at relatively more e##ort be directed to t!ose assertions t!at are more
suscetible to misstatement.
d. Re.uires t!e auditor to make :udgments as to w!et!er misstatements a##ect t!e
#airness o# t!e #inancial statements.
14. ,!ic! o# t!e #ollowing statements is correct concerning t!e concet o# materiality-
a. Materiality re.uires t!at relatively more time be directed to t!ose areas t!at are
more suscetible to irregularities.
b. Materiality and audit risk !ave an inverse relations!i.
c. Materiality !as greater alication to t!e standards o# reorting t!an to t!e ot!er
generally acceted auditing standards.
d. Materiality is measured according to A1'&A standards.
17. Alt!oug! t!e .uantity and content o# audit working aers vary wit! eac! articular
engagement) an auditor's ermanent #iles most likely include
a. 6c!edules t!at suort t!e current year's ad:usting entries.
b. &rior years' accounts receivable con#irmations t!at were classi#ied as e(cetions.
c. "ocumentation indicating t!at t!e audit work was ade.uately lanned and
suervised.
d. Analyses o# caital stock and ot!er owners' e.uity accounts.
18. As art o# understanding t!e internal control structure) an auditor is not re.uired to
a. 'onsider #actors t!at a##ect t!e risk o# material misstatement.
b. Ascertain w!et!er internal control structure olicies and rocedures !ave been
laced in oeration.
c. 1denti#y t!e tyes o# otential misstatements t!at can occur.
d. *btain knowledge about t!e oerating e##ectiveness o# t!e internal control structure.
1;. According to A% +1;) a#ter obtaining a su##icient understanding o# t!e internal control
structure) t!e auditor assesses
a. T!e need to aly 2AA6.
b. "etection risk to determine t!e accetable level o# in!erent risk.
c. "etection risk and in!erent risk to determine t!e accetable level o# control risk.
d. 'ontrol risk to determine t!e accetable level o# detection risk.
20. An e##ective internal control structure
a. Reduces t!e need #or management to review e(cetion reorts on a day5to5day
basis.
b. $liminates risk and otential loss to t!e organi>ation.
c. 'annot be circumvented by management.
d. 1s una##ected by c!anging circumstances and conditions encountered by t!e
organi>ation.
21. ,!en an organi>ation !as a strong internal control structure) management can e(ect
various bene#its. T!e bene#it least likely to occur is
a. Reduced cost o# an e(ternal audit.
b. $limination o# emloyee #raud.
c. Availability o# reliable data #or decision5making uroses and rotection o# imortant
documents and records.
d. 6ome assurance o# comliance wit! t!e 3oreign 'orrut &ractices Act o# 1;77.
22. T!e rimary resonsibility #or establis!ing and maintaining an internal control structure
rests wit!
a. T!e e(ternal auditors.
b. T!e internal auditors.
c. Management.
d. T!e controller or t!e treasurer.
2+. T!e in#ormation and communication comonent o# t!e internal control structure as
de#ined by t!e 'ommittee o# 6onsoring *rgani>ations in its reort) B1nternal 'ontrol 55
1ntegrated 3rameworkB includes
a. &!ysical controls.
b. T!e audit committee.
c. T!e accounting system.
d. T!e organi>ational structure.
24. An auditor s!ould obtain a su##icient understanding o# an entity's internal control
structure to lan t!e audit. At a minimum) t!e understanding s!ould include knowledge
about t!e design o# relevant olicies and rocedures and w!et!er t!ey are
a. 1n oeration.
b. *erating e##ectively.
c. *erating e##iciently.
d. 6atis#actory to t!e auditor.
20. &roer segregation o# duties reduces t!e oortunities #or ersons to be in ositions to
bot!
a. Cournali>e entries and reare #inancial statements.
b. Record cas! receits and cas! disbursements.
c. $stablis! internal controls and aut!ori>e transactions.
d. &eretrate and conceal errors and irregularities.
24. 'ontrol risk and detection risk are correlated inversely. As t!e assessed level o# control
risk c!anges) t!e accetable level o# detection risk also c!anges) and t!e auditor must
alter substantive testing accordingly. 1# control risk is su##iciently low) t!e auditor is least
likely to
a. &er#orm substantive tests at interim dates.
b. %se smaller samles.
c. '!ange #rom a more to a less e##ective rocedure.
d. $liminate all substantive tests #or all assertions.
27. 1n gaining an understanding o# t!e internal control structure) t!e auditor may trace
several transactions t!roug! t!e control rocess. T!e rimary urose o# t!is task is to
a. Relace substantive tests.
b. "etermine w!et!er t!e controls !ave been laced in oeration.
c. "etermine t!e e##ectiveness o# t!e control rocedures.
d. "etect irregularities.
28. An auditor e(amines a samle o# coies o# "ecember and Canuary sales invoices #or
t!e initials o# t!e erson w!o veri#ied t!e .uantitative data. T!e urose is to determine
t!e oerating e##ectiveness o# t!e veri#ication. T!is audit rocedure is an e(amle o# a
a. Test o# controls.
b. 6ubstantive test.
c. 'uto## test.
d. 6tatistical test.
2;. Tests o# controls are concerned rimarily wit! eac! o# t!e #ollowing .uestions e(cet
a. Aow were t!e control olicies and rocedures alied-
b. ,!y were t!e control olicies and rocedures alied-
c. ,ere t!e necessary control olicies and rocedures consistently er#ormed-
d. /y w!om were t!e control olicies and rocedures alied-
+0. T!e likeli!ood o# assessing control risk too !ig! is t!e risk t!at t!e samle selected to
test controls
a. "oes not suort t!e auditor's lanned assessed level o# control risk w!en t!e true
oerating e##ectiveness o# t!e control structure :usti#ies suc! an assessment.
b. 'ontains misstatements t!at could be material to t!e #inancial statements w!en
aggregated wit! misstatements in ot!er account balances or transactions classes.
c. 'ontains roortionately #ewer deviations #rom rescribed internal control structure
olicies or rocedures t!an e(ist in t!e balance or class as a w!ole.
d. "oes not suort t!e tolerable misstatement #or some or all o# management's
assertions.
+1. Analytical rocedures can best be categori>ed as
a. 6ubstantive tests.
b. Tests o# controls.
c. Dualitative tests.
d. /udget comarisons.
+2. Analytical rocedures enable t!e auditor to redict t!e balance or .uantity o# an item
under audit. 1n#ormation to develo t!is estimate can be obtained #rom all o# t!e
#ollowing e(cet
a. Tracing transactions t!roug! t!e system to determine w!et!er rocedures are being
alied as rescribed.
b. 'omarison o# #inancial data wit! data #or comarable rior eriods) anticiated
results ?e.g.) budgets and #orecasts@) and similar data #or t!e industry in w!ic! t!e
entity oerates.
c. 6tudy o# t!e relations!is o# elements o# #inancial data t!at would be e(ected to
con#orm to a redictable attern based uon t!e entity's e(erience.
d. 6tudy o# t!e relations!is o# #inancial data wit! relevant non#inancial data.
++. Analytical rocedures used in lanning an audit s!ould #ocus on
a. $valuating t!e ade.uacy o# evidence gat!ered concerning unusual balances.
b. Testing individual account balances t!at deend on accounting estimates.
c. $n!ancing t!e auditor's understanding o# t!e client's business.
d. 1denti#ying material weaknesses in t!e internal control structure.
+4. A% +00) Audit 6amling) identi#ies two general aroac!es to audit samling. T!ey are
a. Random and nonrandom.
b. 6tatistical and nonstatistical.
c. &recision and reliability.
d. Risk and nonrisk.
+0. $ac! time an internal auditor draws a conclusion based on evidence #rom a samle) an
additional risk) samling risk) is introduced. An e(amle o# samling risk is
a. &ro:ecting t!e results o# samling beyond t!e oulation tested.
b. %sing an imroer audit rocedure wit! a samle.
c. 1ncorrectly alying an audit rocedure to samle data.
d. "rawing an erroneous conclusion #rom samle data.
+4. 6everal risks are in!erent in t!e evaluation o# audit evidence t!at !as been obtained
t!roug! t!e use o# statistical samling. An e(amle o# a beta or Tye 11 error related to
samling risk is t!e #ailure to
a. &roerly de#ine t!e oulation to be samled.
b. "raw a random samle #rom t!e oulation.
c. Re:ect t!e statistical !yot!esis t!at a book value is not materially misstated w!en
t!e true book value is materially misstated.
d. Accet t!e statistical !yot!esis t!at a book value is not materially misstated w!en
t!e true book value is not materially misstated.
+7. 1n er#orming tests o# controls over aut!ori>ation o# cas! disbursements) w!ic! o# t!e
#ollowing statistical samling met!ods is most aroriate-
a. Eariables.
b. 6trati#ied.
c. Ratio.
d. Attribute.
+8. A simle random samle re.uires t!at
a. T!e oulation be unbiased.
b. $very item in t!e oulation !ave an e.ual c!ance o# being selected.
c. T!e distribution o# original data be aro(imately normal.
d. T!e e(ected deviation rate be low ?less t!an 0F@.
+;. An auditor wis!es to samle 200 sales receits #rom a oulation o# 0)000 receits
issued during t!e last year. T!e receits !ave rerinted serial numbers and are
arranged in c!ronological ?and t!us serial number@ order. T!e auditor randomly
c!ooses a receit #rom t!e #irst 20 receits and t!en selects every 20t! receit
t!erea#ter. T!e samling rocedure described !ere is called
a. 6ystematic random samling.
b. "ollar5unit samling.
c. Cudgment interval samling.
d. Eariables samling.
40. 6tatistical samling may be used to test t!e e##ectiveness o# control activities. T!e
auditor's rocedures s!ould result in a statistical conclusion concerning
a. &oulation c!aracteristics occurring at least once in t!e oulation.
b. T!e oulation value not being misstated by more t!an a #i(ed amount.
c. Monetary recision e(ceeding a certain redetermined amount.
d. T!e relation o# t!e oulation deviation rate to t!e tolerable rate.
41. As a result o# samling rocedures alied as tests o# controls) an auditor incorrectly
assesses control risk lower t!an aroriate. T!e most likely e(lanation #or t!is
situation is t!at
a. T!e deviation rates o# bot! t!e auditor's samle and t!e oulation e(ceed t!e
tolerable rate.
b. T!e deviation rates o# bot! t!e auditor's samle and t!e oulation are less t!an
t!e tolerable rate.
c. T!e deviation rate in t!e auditor's samle is less t!an t!e tolerable rate) but t!e
deviation rate in t!e oulation e(ceeds t!e tolerable rate.
d. T!e deviation rate in t!e auditor's samle e(ceeds t!e tolerable rate) but t!e
deviation rate in t!e oulation is less t!an t!e tolerable rate.
A<6,$R6
Duestion 'orrect
<umber Answer
888888888888888888888888
1 "
2 "
+ '
4 A
0 "
4 '
7 '
8 /
; "
10 /
11 A
12 A
1+ A
14 "
10 "
14 /
17 "
18 "
1; "
20 A
21 /
22 '
2+ '
24 A
20 "
24 "
27 /
28 A
2; /
+0 A
+1 A
+2 A
++ '
+4 /
+0 "
+4 '
+7 "
+8 /
+; A
40 "
41 '