AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

MIDTERM EXAMINATION

Question 1
Hardy Company mass-produces eight different products. The controller who is
interested in strengthening internal controls over the accounting for materials
used in production would be most likely to implement a(n):
Response: perpetual inventory system
Correct answer: perpetual inventory system
Score: 1 out of 1 Yes

Question 2
What makes industries specialized is that they are likely either to have specific
financial reporting standards applicable to them.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 3
Unrecorded liabilities are most likely to be found during the review of which of
the following documents?
Response: Unpaid bills
Correct answer: Unpaid bills
Score: 1 out of 1 Yes

Question 4
When controls are deemed ineffective and assessed control risk is at the
maximum for a private company, there will be ______ emphasis placed on tests of
controls
Response: no
Correct answer: no
Score: 1 out of 1 Yes

Question 5
When auditing a public warehouse, which of the following is the most important
audit procedure with respect to disclosing unrecorded liabilities?
Response: Inspection of receiving and issuing procedures
Correct answer: Inspection of receiving and issuing procedures
Score: 1 out of 1 Yes

Question 6
Which of the following is an internal control weakness for a company whose
inventory of supplies consists of a large number of individual items?
Response: The storekeeper is responsible for maintenance of perpetual inventory
records.
Correct answer: The storekeeper is responsible for maintenance of perpetual
inventory records.
Score: 1 out of 1 Yes

Question 7
Competence in the audit involving specialized industry can be acquired by
having an experience with relevant regulatory or reporting requirements.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 8
When an outside specialist has assumed full responsibility for taking the client’s
physical inventory, reliance on the specialist’s report is acceptable if:
Response: the auditor conducted the same audit tests and procedures as would
have been applicable if the client’s employees took the physical inventory
Correct answer: the auditor conducted the same audit tests and procedures as
would have been applicable if the client’s employees took the physical inventory
Score: 1 out of 1 Yes

Question 9
In business risks approach, the involvement of partners and senior managers in
planning is much greater than in audit risk approach.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 10
Guidance on the specific application of IFRS Standards relating or applicable to
a specific specialized industry can be of great help when identifying risks of
material misstatement.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 11
The auditor interviews the plant manager. The auditor is most likely to rely upon
this interview as primary support for an audit conclusion on:
Response: the necessity to record a provision for deferred maintenance costs
Correct answer: the necessity to record a provision for deferred maintenance
costs
Score: 1 out of 1 Yes

Question 12
To best ascertain that a company has properly included merchandise that it
owns in its ending inventory, the auditor should review and test the:
Response: purchase cutoff procedures
Correct answer: purchase cutoff procedures
Score: 1 out of 1 Yes

Question 13
Which of the following relationships between types of tests and audit evidence
is not correct?
Response: Tests of details and observation.
Correct answer: Tests of details and observation.
Score: 1 out of 1 Yes

Question 14
For manufactured inventories, the valuation assertion is best tested by
Response: Tracing unit costs appearing on final inventory listings to auditor's
copy of audited finished goods unit costs
Correct answer: Tracing unit costs appearing on final inventory listings to
auditor's copy of audited finished goods unit costs
Score: 1 out of 1 Yes

Question 15
An increased extent of tests of controls is most likely to occur when:
Response: controls are effective and the preliminary control risk assessment is
low
Correct answer: controls are effective and the preliminary control risk
assessment is low
Score: 1 out of 1 Yes

Question 16
Which of the following explanations might satisfy an auditor who discovers
significant debits to an accumulated depreciation account?
Response: Extraordinary repairs have lengthened the life of an asset
Correct answer: Extraordinary repairs have lengthened the life of an asset
Score: 1 out of 1 Yes

Question 17
Specialized industries are rare or even usual.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 18
The failure to capitalize a permanent asset, or the recording of an asset
acquisition at the improper amount, affects the income statement:
Correct answer: for the depreciable life of the asset

Question 19
After finishing the review phase of the study and evaluation of internal control in
an audit, the auditor should perform tests of controls on:
Response: those controls that the auditor wants and plans to rely upon
Correct answer: those controls that the auditor wants and plans to rely upon
Score: 1 out of 1 Yes

Question 20
Assume that the client’s valuation of an inventory item is P10 per unit for 1,000
units, using LIFO. If the most recent acquisition of a layer of inventory was for
600 units at P10 per unit and the immediately preceding layer was for 700 units at
P9 per unit, the inventory item is in error and it is:
Response: overstated P700
Correct answer: overstated P700
Score: 1 out of 1 Yes

Question 21
Identification of the risk of material misstatement in a specialized industry
should be approached in the same way a in any other audit.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 22
The auditor is most likely to seek information from the plant manager with
respect to the
Response: Existence of obsolete machinery
Correct answer: Existence of obsolete machinery
Score: 1 out of 1 Yes

Question 23
To test the accuracy of the current year's depreciation charges, an auditor
should rely most heavily on
Response: Re-computation of depreciation for a sample of plant assets
Correct answer: Re-computation of depreciation for a sample of plant assets
Score: 1 out of 1 Yes

Question 24
If the results of the tests of controls, substantive tests of transactions, and
analytical procedures are not consistent with the predictions, tests of details of
balances will be:
Response: changed
Correct answer: changed
Score: 1 out of 1 Yes

Question 25
The tests of details of balances procedure for fixed assets which require the
auditor to examine vendors’ invoices of closely related accounts such as repairs
and maintenance to uncover items that should be fixed assets would satisfy the
audit objective of:
Response: completeness
Correct answer: completeness
Score: 1 out of 1 Yes

Question 26
Business risk approach and audit risk approach are similar
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 27
Which of the following audit tests is usually the least costly to perform?
Response: Analytical procedures
Correct answer: Analytical procedures
Score: 1 out of 1 Yes

Question 28
The audit procedure of analyzing the repairs and maintenance accounts is
primarily designed to provide evidence in support of the audit proposition that all
Correct answer: Expenditures for fixed assets have been capitalized

Question 29
The auditor may conclude that depreciation charges are insufficient by noting
Response: Excessive recurring losses on assets retired
Correct answer: Excessive recurring losses on assets retired
Score: 1 out of 1 Yes

Question 30
Auditors who test manual controls that rely on IT-generated reports must
consider:
Response: the controls related to the accuracy of the information in the report
Correct answer: the controls related to the accuracy of the information in the
report
Score: 1 out of 1 Yes

Question 31
Which one of the following procedures would not be appropriate for an auditor in
discharging his responsibilities concerning the client’s physical inventories?
Response: Supervising the taking of the annual physical inventory
Correct answer: Supervising the taking of the annual physical inventory
Score: 1 out of 1 Yes

Question 32
Income statement accounts resulting from allocations are typically verified as a
part of:
Response: analytical procedures
Correct answer: analytical procedures
Score: 1 out of 1 Yes

Question 33
The erroneous inclusion of transactions that should properly be recorded as
assets into accounts such as repairs expense, lease expense, or supplies is a
common client error. The auditor should evaluate the likelihood of these types of
misclassifications in conjunction with:
Response: obtaining an understanding of internal control
Correct answer: obtaining an understanding of internal control
Score: 1 out of 1 Yes

Question 34
Which of the following audit tests is usually the most costly to perform?
Response: Test of balances
Correct answer: Tests of balances
Score: 1 out of 1 Yes

Question 35
It is not important to remember that while there may be specific risks of
material misstatement relating to the industry – specific balances and
transactions, there must also be appropriate consideration of the “normal”
balances and transaction.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 36
Which of the following tests form the basis for an auditor’s report on internal
control over financial reporting?
Response: Tests of controls
Correct answer: Tests of controls
Score: 1 out of 1 Yes

Question 37
Assume that the client’s valuation of an inventory item is P10 per unit for 1,000
units, using first-in, first-out (FIFO). If the most recent acquisition of inventory
was for 600 units at P10 per unit and the immediately preceding acquisition was
for 700 units at P9 per unit, the inventory
Response: overstated P400
Correct answer: overstated P400
Score: 1 out of 1 Yes

Question 38
An auditor might use several different procedures to test for the proper
accounting for retirement of plant and equipment. Which of the following tests
would be the most effective in providing evidence about the retirement of fixed
assets?
Response: Analysis of debits to the accumulated depreciation account
Correct answer: Analysis of debits to the accumulated depreciation account
Score: 1 out of 1 Yes

Question 39
In performing an audit on the existence of inventory contained in a warehouse,
an auditor is primarily concerned with
Response: Observing and testing the number of units on hand
Correct answer: Observing and testing the number of units on hand
Score: 1 out of 1 Yes

Question 40
Analytical procedures are defined in the auditing standards as
Response: substantive tests
Correct answer: substantive tests
Score: 1 out of 1 Yes

Question 41
An auditor would be least likely to use confirmations in connection with the
examination of:
Response: property, plant, and equipment
Correct answer: property, plant, and equipment
Score: 1 out of 1 Yes

Question 42
If the client fails to record disposals of property, plant, and equipment, both the
original cost of the asset account and the net book value will be incorrect.
Response: The original cost will be overstated indefinitely, and the net book value
will be overstated until the asset is fully depreciated
Correct answer: The original cost will be overstated indefinitely, and the net book
value will be overstated until the asset is fully depreciated
Score: 1 out of 1 Yes

Question 43
____________ both have the effect of simultaneously verifying balance sheet and
income statement accounts.
Response: Tests of controls and substantive tests of transactions
Correct answer: Tests of controls and substantive tests of transactions
Score: 1 out of 1 Yes

Question 44
Which of the following is the most important internal control procedure over
acquisitions of property, plant, and equipment?
Response: Using a budget to forecast and control acquisitions and retirements
Correct answer: Using a budget to forecast and control acquisitions and
retirements
Score: 1 out of 1 Yes

Question 45
An auditor analyzes repairs and maintenance accounts primarily to obtain
evidence in support of the audit assertion that all
Response: Expenditures for property and equipment have not been charged to
expense
Correct answer: Expenditures for property and equipment have not been charged
to expense
Score: 1 out of 1 Yes

Question 46
Cost accounting controls are those related to the physical inventory and the
consequent costs from the point at which:
Response: raw materials are requisitioned until the finished product is sent to
storage
Correct answer: raw materials are requisitioned until the finished product is sent
to storage
Score: 1 out of 1 Yes

Question 47
Tests of transactions are used to determine whether ___________ have been
satisfied
Response: transaction-related audit objectives
Correct answer: transaction-related audit objectives
Score: 1 out of 1 Yes

Question 48
Audit risk approach is also known as “top to bottom up approach”.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 49
Even if the audit staff have no experience in the audit of a specialized industry,
risk of material misstatement can still be easily identified by the audit staff.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 50
Which of the following tests commonly occur together?
Response: Substantive tests of transactions and tests of controls
Correct answer: Substantive tests of transactions and tests of controls
Score: 1 out of 1 Yes

Question 51
Which of the following audit tests would be regarded as a test of controls?
Response: Tests of the signatures on canceled checks to board of directors’
authorizations
Correct answer: Tests of the signatures on canceled checks to board of directors’
authorizations
Score: 1 out of 1 Yes

Question 52
Which of the following audit procedures would provide the least reliable
evidence that the client has legal title to inventories?
Response: Analytical review of inventory balances compared to purchasing and
sales activities
Correct answer: Analytical review of inventory balances compared to purchasing
and sales activities
Score: 1 out of 1 Yes

Question 53
Analytical procedures must be performed in:
Response: the planning and completion stages
Correct answer: the planning and completion stages
Score: 1 out of 1 Yes

Question 54
The auditor must consider whether the expert’s findings are consistent with the
auditor’s understanding of the client and with the conclusions of other audit
procedures. Any inconsistencies need not be investigated.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 55
In the audit of sugar industries, one audit procedure that the auditor should
focused into where a company cultivates sugarcane on its own farm is to verify
and obtain documentary evidence regarding depreciation of equipment being
rented.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 56
Software development industries can be considered as one of a specialized
industry.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 57
Controls which provide a means of ensuring that the physical counts are
properly summarized, priced at the same amount as the unit records, correctly
extended and totaled, and included in the general ledger at the proper amount are
known as:
Response: compilation internal controls
Correct answer: compilation internal controls
Score: 1 out of 1 Yes

Question 58
In the audit of banks, there will be plenty of risk to consider other than those
relating to bank specific transactions and balances.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 59
When accepting an audit engagement involving a specialized industry, the audit
firm needs to pay close attention to the competence of the audit firm to provide
the service.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 60
Example of specialized industries are real estate industry
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 61
Which of the following statements is not true?
Response: Tests of controls are concerned with evaluating whether controls are
sufficiently effective to justify reducing control risk and thereby reducing
analytical review procedures
Correct answer: Tests of controls are concerned with evaluating whether
controls are sufficiently effective to justify reducing control risk and thereby
reducing analytical review procedures
Score: 1 out of 1 Yes

Question 62
There is a danger of over-reliance on the expert’s findings and conclusions.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 63
The primary emphasis in most tests of details of balances is on the:
Response: balance sheet accounts
Correct answer: balance sheet accounts
Score: 1 out of 1 Yes

Question 64
Many auditors perform extensive analytical procedures on audits because:
Response: they indicate areas of potential risk and misstatement
Correct answer: they indicate areas of potential risk and misstatement
Score: 1 out of 1 Yes

Question 65
It is very difficult for a small audit firm to meet competence requirements if they
choose to specialized in the audit of clients in one particular sector.
Response: False
Correct answer: False
Score: 1 out of 1 Yes

Question 66
Tests of controls address each of the following questions except:
Response: Why were the procedures performed?
Correct answer: Why were the procedures performed?
Score: 1 out of 1 Yes
Question 67
In valuing inventory, the auditor must consider all but which of the following
factors?
Response: All inventory must be valued using the same valuation method under
GAAP
Correct answer: All inventory must be valued using the same valuation method
under GAAP
Score: 1 out of 1 Yes

Question 68
Tests of details of balances focus on
Response: end of the year balances
Correct answer: end of the year balances
Score: 1 out of 1 Yes

Question 69
The business risks of increase in the prices of raw materials obtained from a
foreign country can be manage by hedging.
Response: True
Correct answer: True
Score: 1 out of 1 Yes

Question 70
The audit procedures used to verify accrued liabilities differ from those
employed for the verification of accounts payable because:
Response: accrued liabilities usually pertain to services of a continuing nature,
whereas accounts payable are the result of completed transactions
Correct answer: accrued liabilities usually pertain to services of a continuing
nature, whereas accounts payable are the result of completed transactions
Score: 1 out of 1 Yes