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False Chap 6
1. When developing the audit objectives, the first step is to divide the financial statements into cycles.
2. The auditors determine which disclosures must be presented in the financial statements.
3. Errors are usually more difficult for an auditor to detect than frauds
4. Audits are expected to provide a higher degree of assurance for the detection of material frauds than
is provided for an equally material error.

5. The auditor’s first course of action when an illegal act is uncovered should be to immediately notify
the appropriate authorities, including but not limited to, law enforcement and the Securities and
Exchange Commission.

6. Auditing standards indicate that reasonable assurance is a moderate, but not absolute, level of
assurance that the financial statements are free of material misstatement.

7. In obtaining reasonable assurance that the financial statements are free of material misstatement,
the auditor does notneed to take into account the applicable legal and regulatory framework relevant
to the client.

8. The objective of the audit of financial statements by an independent auditor is to verify that the
financial statements are free of misstatements and accurately represent the company’s financial
position and results of operations
9. A suspension of judgment is the recognition that people’s motivations and perceptions can lead them
to provide biased or misleading information.
10. During the professional judgment process, the analysis may identify only one appropriate response to
the issue.
11. Overconfidence is the tendency to put more weight on information that is consistent with the initial
beliefs or preferences.
12. Under the cycle approach to segmenting an audit, transactions recorded in different journals should
never be combined with the general ledger balances that result from those transactions.
13. Under the cycle approach, the only accounts that have two or more cycles associated with them are
cash and accounts receivable.
14. When an auditor is determining what information to include in the notes to the financial statements
relating to bonds payable, he is concerned with the transaction-related audit objectives.
15. General transaction-related audit objectives vary from audit to audit, depending on the nature and
characteristics of the client’s business and industry.

16. The effect of a violation of the completeness transaction-related audit objective for cash
disbursements transactions would be an overstatement of cash disbursements.
17. The transaction-related audit objective that deals with whether recorded transactions have actually
occurred is the completeness objective.
18. Balance-related audit objectives are usually applied to the ending balance in income statement
accounts; transaction-related audit objectives are usually applied to transactions reflected in balance
sheet accounts.
19. Tests of details of balances typically involve the use of comparisons and relationships to assess the
overall reasonableness of account balances
20. For a private company audit, tests of controls are normally performed only on those internal controls
the auditor believes have notbeen operating effectively during the period under audit.
21. The audit objectives are the well-defined methodology for organizing an audit to ensure that the
evidence gathered is sufficient and appropriate.
22. Obtaining an understanding of the entity and its environment is part of the analytical procedures
phase of the audit.
Chap 7
23. All evidence must have the same level of persuasiveness.
24. Audit evidence to support an opinion about the fairness of a client’s financial statements consists
entirely of written information.
25. Inquiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit
objective.
26. The two most important factors when determining the appropriate sample size in an audit are the
auditor’s expectation of misstatements and the objectivity of the evidence.
27. When analytical procedures reveal unusual fluctuations in an account balance, the auditor will
probably perform fewer tests of details for that account and increase the tests of controls related to
the account.
28. Accounts receivable confirmations must be controlled by the client from the time they are prepared
until the time they are returned to the auditor.
29. When the auditor foots the journals and the subsidiary ledgers, it is considered reperformance.
30. Inspection consists of looking at a process or procedure being performed by others.
31. A canceled check written by the client, made payable to a local supplier and drawn on the client’s
bank account is one type of internal document.
32. Substantive analytical procedures performed in all phases of the audit generally use aggregate data to
help understand where misstatements are more likely to occur.
33. Auditors use trends in the accounts receivable turnover ratio to assess the reasonableness of the
company’s credit policies.
34. The most widely used profitability ratio is the gross profit percent
35. Audit documents are the joint property of the auditor and the audit client.
36. Auditing standards require that records for audits of private companies be retained for a minimum of
seven years
37. An example of a supporting schedule is a reconciliation of amounts, which consists of the details that
make up a year-end balance.
38. Since confirmation replies and copies of client agreements are not considered schedules in the usual
sense, they are not indexed and filed.
Chap 8
39. A 100 % audit risk is complete certainty.
40. Before accepting a new client, most CPA firms investigate the company to determine its acceptability.
However, AICPA confidentiality requirements prohibit CPA firms from contacting certain parties–
namely the company’s attorneys and bankers–during this investigation.
41. For prospective clients that have previously been audited by another CPA firm, the predecessor
auditor must initiate the communication with the successor auditor.
42. When a successor auditor contacts a company’s previous auditor, the predecessor auditor is required
to respond fully and without limit to the request for information
43. A predecessor auditor who has been contacted by a successor auditor for information about the
client does nothave to obtain permission from the former client before providing any confidential
information to the successor auditor because the confidentiality requirement does notextend to
former clients.
44. Because auditors are responsible for having appropriate competence and capabilities to perform an
audit, auditors are notnormally permitted to consult with outside specialists during an audit
engagement.
45. If a prospective client has been audited in the past, the successor auditor will typically rely solely on
the representations about the client by the predecessor auditor.
46. Because of the lack of independence between related parties, the Sarbanes-Oxley Act prohibits all
related party transactions.
47. Material transactions between the client and the client’s related parties must be disclosed in the
auditor’s report.
48. Operations are approaches followed by the entity to achieve organizational objectives.
49. In order to be meaningful, a company’s ratios should be compared to their prior year’s ratios, not
industry benchmarks.
50. Materiality does notdepend on the decisions of users who rely on the statements to make the
decisions
51. The first step in applying materiality is to determine performance materiality.
52. Net assets are the most often used base for deciding materiality.
53. Amounts involving fraud are not usually considered qualitative factors affecting the preliminary
materiality judgment.
54. Statements on Auditing Standards provide detailed, objective guidance on how auditors are to
establish a preliminary materiality level, thus eliminating the need for subjective auditor judgment in
this task.
55. Net income before taxes is the normal base used to determine materiality for a not-for-profit
organization.
56. Most practitioners allocate the preliminary judgment about materiality to both the balance sheet and
income statement accounts.
57. If the total misstatement of an account is known, a sampling error still needs to be determined.
58. Sampling risk results if the sample accurately represents the population.
CHAP 11
59. Section 404 of the Sarbanes-Oxley Act requires that both private and public companies issue an
internal control report.
60. Under the Dodd-Frank federal financial reform legislation, all public companies are required to obtain
an audit report on internal control over financial reporting.
61. When a company designs and implements internal controls, cost of the controls is nota valid
consideration.
62. Control activities are a subcomponent of the information and communication component of internal
control.
63. Adequate documents and records is a subcomponent of the control environment.
64. Auditing standards prohibit reliance on the work of internal auditors due to the lack of independence
of the internal auditors.
65. An example of a specific authorization is management setting a policy authorizing the ordering of
inventory when less than a one-week supply is on hand
66. The effectiveness of automated controls depends solely on the competence of the personnel
performing the controls.
67. Output controls focus on preventing errors during processing.
68. IT controls are classified as either input controls or output controls.
69. Companies using e-commerce systems to transact business electronically do notneed to be
concerned about how their e-commerce partners manage IT systems risks.

To evaluate a company, Accounts Receivable turnover ratios are used by investors and analysts to
assess its liquidity and determine the effectiveness of its credit and collection policies.
Accounts Receivable turnover ratio categorized under Activity Ratios, is one of the key metrics
measured by companies to assess the company’s financial health and can provide insight into a
company’s ability to collect on outstanding invoices.

If the Average Collection Period is 45 days means that, on average, accounts receivable take 45 days
to get converted into cash. In other words, credit sales are locked up in accounts receivable for 45
days.

An increase in the average collection period indicates the blockage of funds with accounts receivable,
which increases the risk of bad debts. A higher average collection period is, thus, an indication of the
inefficiency of the accounts receivable management process or high customer dissatisfaction

The significance of the AR turnover ratio is that this ratio indicates the speed with which the amount
is collected from accounts receivable. The higher the ratio, the better it is. It indicates that the
amount from accounts receivable is being collected more quickly.

The more quickly the accounts receivable are collected, the less the risk from bad debts, and so the
lower the expenses of collection and increase in the liquidity of the firm. A lower accounts receivable
ratio will indicate a need to revisit the accounts receivable management process and tighten the
firm’s credit sales policy. It also means that credit sales have been made to customers who do not
deserve much credit and expose your company to losses due to bad debts. For example, a
comparison between two periods, if the accounts receivable turnover ratio has decreased from 12
times to 8 times, it indicates that the amount from accounts receivable is not being collected in time.
The company’s policy relating to the collection of accounts receivable and the selection of customers
for credit sales purposes is not sound.

The inventory turnover ratio is a really useful financial metric, especially for those companies that has
inventory. It measures the number of times a company's inventory is sold and replaced over a specific
period, typically a year. A higher inventory is usually better, though there may be downsides to a high
turnover

A low inventory turnover ratio might be a sign of weak sales or excessive inventory, also known as
overstocking. It could indicate a problem with a retail chain’s merchandising strategy or inadequate
marketing. Generally speaking, a low inventory turnover ratio means the product is not flying off the
shelf, so demand for the product may be low.

A high inventory turnover ratio, on the other hand, suggests strong sales. Alternatively, it could be the
result of insufficient inventory. As problems go, ensuring a company has sufficient inventory to
support strong sales is a better one to have than needing to scale down inventory because business is
lagging.

Companies tend to want to have a lower DSI, and they usually want that DSI to be sufficient enough
to cover short-term cash needs..