Auditing 3.

The Amazing Auditing Test Your Knowledge Test!

Kom verder. Saxion.

Kom verder. Saxion.

Question 1.
• As part of assessing internal control risk, the
auditor will assess the objectivity of a client's
internal auditors. How would the CPA most likely
consider the objectivity of internal auditor's?
Kom verder. Saxion.

Question 2.
• When auditing an annual report, the auditor
must choose a mixture between tests of control
and substantive procedures. After obtaining an
understanding of internal control and arriving at
a preliminary assessed level of control risk, an
auditor decided to perform tests of controls,
and a small sample of substantive procedures.
What can you conclude about internal control in
this organization?
Kom verder. Saxion.

Question 3.
• What is likely to happen with the audit
procedures when the assessed level of control
risk increases?
Kom verder. Saxion.

Question 4.
• In the consideration of internal control, the
auditor is basically concerned that it provides
reasonable assurance that management cannot
override the system. Comment on this
statement.
Kom verder. Saxion.

Question 5.a
• Independent auditors should consider the work
of internal auditors in their assessment of
control risk.
• Are internal auditors independent of
management? Explain.
Kom verder. Saxion.

Question 5.b
• Independent auditors should consider the work
of internal auditors in their assessment of
control risk.
• What is the difference between the primary
objective of the independent auditors and that
of internal auditors? Explain.
Kom verder. Saxion.

Question 6.
• To provide for the greatest degree of
independence in performing his internal
auditing functions, the internal auditor of the
HQ4U company, reports directly to the board of
directors. Comment on this procedure.
Kom verder. Saxion.

Question 7.
• How would the auditor sample, if he wants to
audit completeness?
Kom verder. Saxion.

Question 8.
• It is unlikely that sufficient evidence is available
to support an opinion on the financial
statements, would this lead an auditor to
conclude that a potential audit engagement
should not be accepted?
Kom verder. Saxion.

Question 9.
• When a company has changed auditors,
according to the GAAS, the successor auditor
has the responsibility to initiate contact with the
predecessor auditor.
• Why is this so?
Kom verder. Saxion.

Question 10.
• What is an inherent risk?
Kom verder. Saxion.

Question 11.
• Management operating as well as financing
decisions are dominated by top management.
Would an auditor considered this to be a
financial statement audit risk factor?
Kom verder. Saxion.

Question 12.
• How do auditors call the procedure in which
they compare financial information with similar
information regarding the industry in which the
entity operates?
Kom verder. Saxion.

Question 13.
• What type of transactions ordinarily have high
inherent risk because they involve management
judgments or assumptions in formulating
accounting balances?
Kom verder. Saxion.

Question 14.a
• Auditors perform various tasks in planning an
audit engagement. Provide an overall
description of how each task is performed and
its purpose.
• Obtain an understanding of the client's
business.
Kom verder. Saxion.

Question 14.b
• Auditors perform various tasks in planning an
audit engagement. Provide an overall
description of how each task is performed and
its purpose.
• Assess audit risk and materiality for the
engagement.
Kom verder. Saxion.

Question 15.
• Auditors distinguish six assertions relating to
classes of transactions.
• What does the assertion ‘sufficiency’ stand for?
Kom verder. Saxion.

Question 16.
• In preparing for an audit of the retail footwear
division of a major retail organization, the
auditor gathered the following information
about the organization's stores:
Kom verder. Saxion.

Question 16.
• When a covered member continues to hold an
immaterial indirect financial interest in the
client, would he be considered to be
independent when performing the audit of the
financial statements of this new client?
Kom verder. Saxion.

Question 17.
• Why has the profession of certified public
accountants deemed it essential to promulgate a
code of professional conduct and to establish a
mechanism for enforcing observation of the
code?
Kom verder. Saxion.

Question 18.
• An audit independence issue might be raised by
the auditor's participation in consulting services
engagements.
• Give two examples of an undesirable
combination of services
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
a) Sales journal
b) Invoice register
c) Payroll journal
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
a) Sales journal
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
b) Invoice register
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
c) Payroll journal
Kom verder. Saxion.

Question 20.
Which of the following is a principle underlying an audit
conducted in accordance with generally accepted
auditing standards?
A. The audit provides reasonable assurance the client
will remain in business for at least one year.
B. The audit report expresses an opinion on whether
the financial statements are free of material and
immaterial misstatement.
C. Auditors are responsible for, among other things,
maintaining professional objectivism, exercising
professional engagement, and obtaining appropriate
documentation.
D. An auditor's opinion enhances the degree of
confidence that intended users can place in the
financial statements.
Kom verder. Saxion.

Question 21.
The auditors who find that the client has committed an
illegal act would be most likely to withdraw from the
engagement when the:
A. Management fails to take appropriate corrective
action.
B. Illegal act has material financial statement
implications.
C. Illegal act has received widespread publicity.
D. Auditors cannot reasonably estimate the effect of
the illegal act on the financial statements
Kom verder. Saxion.

Question 22.
Which of the following attributes is more closely
associated with attestation services performed by a CPA
firm than with other lines of professional work?
A. Integrity.
B. Competence.
C. Independence.
D. Keeping informed on current professional
developments.
Kom verder. Saxion.

Question 23.
Analytical procedures are most likely to detect:
A. Weaknesses of a material nature in internal control
B. Unusual transactions
C. Noncompliance with prescribed control activities
D. Improper separation of accounting and other
financial duties
Kom verder. Saxion.

Question 24.
An abnormal fluctuation in gross profit that might
suggest the need for extended audit procedures for
sales and inventories would most likely be identified in
the risk assessment phase of the audit by the use of:
A. Tests of transactions and balances.
B. An assessment of internal control.
C. Specialized audit programs.
D. Analytical procedures.
Kom verder. Saxion.

Question 25.
• Assume that you have been assigned to the
audit of Williamson Manufacturing Company.
You have completed the procedures for
gathering information about the company and
its environment, including internal control.
Kom verder. Saxion.

Question 25.a
Describe the next stage of the audit process.
Kom verder. Saxion.

Question 25.b
Explain how the auditors may respond to high risk
audit engagements and high risk financial
statement assertions.
Kom verder. Saxion.

Question 25.c
Describe the nature of further audit procedures,
and explain the situation in which the procedures
should include tests of controls.
Kom verder. Saxion.

Question 1.
• As part of assessing internal control risk, the
auditor will assess the objectivity of a client's
internal auditors. How would the CPA most likely
consider the objectivity of internal auditor's?

• The CPA would consider the organizational

status of internal control within the company.
Kom verder. Saxion.

Question 2.
• When auditing an annual report, the auditor
must choose a mixture between tests of control
and substantive procedures. After obtaining an
understanding of internal control and arriving at
a preliminary assessed level of control risk, an
auditor decided to perform tests of controls,
and a small sample of substantive procedures.
What can you conclude about internal control in
this organization?

• The auditor has reason to believe that internal

control is designed and well and that the
internal control procedures have been
implemented.
Kom verder. Saxion.

Question 3.
• What is likely to happen with the audit
procedures when the assessed level of control
risk increases?

• The auditor will use larger sample sizes for

substantive procedures.
Kom verder. Saxion.

Question 4.
• In the consideration of internal control, the
auditor is basically concerned that it provides
reasonable assurance that management cannot
override the system. Comment on this
statement.

• Management can always override the system,

the auditors main concern is that misstatements
have been prevented or detected
Kom verder. Saxion.

Question 5.a
• Independent auditors should consider the work
of internal auditors in their assessment of
control risk.
• Are internal auditors independent of
management? Explain.

• No. However, internal auditors may achieve

independence from departments they evaluate
by reporting to a senior officer or the board of
directors.
Kom verder. Saxion.

Question 5.b
• Independent auditors should consider the work
of internal auditors in their assessment of
control risk.
• What is the difference between the primary
objective of the independent auditors and that
of internal auditors? Explain.

• The independent auditors' objective is to

express an opinion on the client's financial
statements. The internal auditors' primary
objective is to aid management in achieving the
most efficient and effective administration of the
business.
Kom verder. Saxion.

Question 6.
• To provide for the greatest degree of
independence in performing his internal
auditing functions, the internal auditor of the
HQ4U company, reports directly to the board of
directors. Comment on this procedure.

• For obtaining the greatest degree of

independence, the internal auditor should report
directly to the audit committee.
Kom verder. Saxion.

Question 7.
• How would the auditor sample, if he wants to
audit completeness?

• From source documents to General ledger

Kom verder. Saxion.

Question 8.
• It is unlikely that sufficient evidence is available
to support an opinion on the financial
statements, would this lead an auditor to
conclude that a potential audit engagement
should not be accepted?

• Yes, if an opinion cannot be achieved because of

a lack of evidence, an audit would be of no use.
Kom verder. Saxion.

Question 9.
• When a company has changed auditors,
according to the GAAS, the successor auditor
has the responsibility to initiate contact with the
predecessor auditor.
• Why is this so?

• To ask about the client before the engagement

is accepted to become aware of matters bearing
on the integrity of management. The previous
auditor can only answer these questions if
management of that company allows him/her to
do so.
Kom verder. Saxion.

Question 10.
• What is an inherent risk?

• The risk of a material misstatement occurring in

an account, assuming an absence of internal
control.
Kom verder. Saxion.

Question 11.
• Management operating as well as financing
decisions are dominated by top management.
Would an auditor considered this to be a
financial statement audit risk factor?

• No, it is the task of management to not only

manage operations but to also decide upon
finance decisions.
Kom verder. Saxion.

Question 12.
• How do auditors call the procedure in which
they compare financial information with similar
information regarding the industry in which the
entity operates?

• An analytical procedure.
Kom verder. Saxion.

Question 13.
• What type of transactions ordinarily have high
inherent risk because they involve management
judgments or assumptions in formulating
accounting balances?

• Estimation
Kom verder. Saxion.

Question 14.a
• Auditors perform various tasks in planning an
audit engagement. Provide an overall
description of how each task is performed and
its purpose.
• Obtain an understanding of the client's
business.
Kom verder. Saxion.

Question 14.a
• The auditors obtain an understanding of the
client's business through procedures such as
inquiry of client personnel, observing client
operations and other industry publications, and
reviewing prior annual reports, tax returns, and
interim financial statements. An understanding
of the client's business is necessary to the
evaluation of the appropriateness of the client's
transactions, accounting principles used, and
the estimates and assumptions embodied in the
financial statements. In addition, it provides part
of the information to assess the risks of material
misstatement.
Kom verder. Saxion.

Question 14.b
• Auditors perform various tasks in planning an
audit engagement. Provide an overall
description of how each task is performed and
its purpose.
• Assess audit risk and materiality for the
engagement.
Kom verder. Saxion.

Question 14.b
• Materiality for planning purposes is the auditors'
preliminary estimate of the smallest amount of
misstatement that would affect the decisions of
reasonable users of the financial statements.
The auditors use judgment to determine the
amount of planning materiality, usually based
on some rule of thumb. Audit risk is the
possibility that the auditors will fail to modify
the opinion on financial statements that are
materially misstated. The auditors assess this
risk by considering characteristics of
management, operations, and the engagement.
Kom verder. Saxion.

Question 15.
• Auditors distinguish six assertions relating to
classes of transactions.
• What does the assertion ‘sufficiency’ stand for?

• Sufficiency is not considered to be one of the

six assertions.
Kom verder. Saxion.

Question 16.
• When a covered member continues to hold an
immaterial indirect financial interest in the
client, would he be considered to be
independent when performing the audit of the
financial statements of this new client?

• No, because the covered member can only be

considered to be independent if he has no
financial interest in the company he is auditing.
Kom verder. Saxion.

Question 17.
• Why has the profession of certified public
accountants deemed it essential to promulgate a
code of professional conduct and to establish a
mechanism for enforcing observation of the
code?

• A distinguishing mark of this profession is its

acceptance of responsibility to the public
Kom verder. Saxion.

Question 18.
• An audit independence issue might be raised by
the auditor's participation in consulting services
engagements.
• Give two examples of an undesirable
combination of services

• The auditor should not make management

decisions for an audit client
• The auditor should not be involved in
bookkeeping
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
a) Sales journal
b) Invoice register
c) Payroll journal
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
a) Sales journal

Copies of consecutive numbered sales invoices,

signed contracts, shipping records, customers'
purchase orders.
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
b) Invoice register

Vendors' invoices (originals) or signed contracts,

properly approved by the accounting department,
with attached receiving reports; consecutively
numbered copies of purchase orders; freight bills.
Kom verder. Saxion.

Question 19.
What would you accept as satisfactory documentary
evidence in support of entries in the following?
c) Payroll journal

Approved time cards or piecework tickets; approved

wage and salary increase or decrease notices;
personnel department records; union contracts;
contracts with individual employees (including
officers); paid checks; payroll receipts, if any; social
security and income tax withholding records.
Kom verder. Saxion.

Question 20.
Which of the following is a principle underlying an audit
conducted in accordance with generally accepted
auditing standards?
A. The audit provides reasonable assurance the client
will remain in business for at least one year.
B. The audit report expresses an opinion on whether
the financial statements are free of material and
immaterial misstatement.
C. Auditors are responsible for, among other things,
maintaining professional objectivism, exercising
professional engagement, and obtaining appropriate
documentation.
D. An auditor's opinion enhances the degree of
confidence that intended users can place in the
financial statements.
Kom verder. Saxion.

Question 20.
Which of the following is a principle underlying an audit
conducted in accordance with generally accepted
auditing standards?
A. The audit provides reasonable assurance the client
will remain in business for at least one year.
B. The audit report expresses an opinion on whether
the financial statements are free of material and
immaterial misstatement.
C. Auditors are responsible for, among other things,
maintaining professional objectivism, exercising
professional engagement, and obtaining appropriate
documentation.
D. An auditor's opinion enhances the degree of
confidence that intended users can place in the
financial statements.
Kom verder. Saxion.

Question 21.
The auditors who find that the client has committed an
illegal act would be most likely to withdraw from the
engagement when the:
A. Management fails to take appropriate corrective
action.
B. Illegal act has material financial statement
implications.
C. Illegal act has received widespread publicity.
D. Auditors cannot reasonably estimate the effect of
the illegal act on the financial statements
Kom verder. Saxion.

Question 21.
The auditors who find that the client has committed an
illegal act would be most likely to withdraw from the
engagement when the:
A. Management fails to take appropriate corrective
action.
B. Illegal act has material financial statement
implications.
C. Illegal act has received widespread publicity.
D. Auditors cannot reasonably estimate the effect of
the illegal act on the financial statements
Kom verder. Saxion.

Question 22.
Which of the following attributes is more closely
associated with attestation services performed by a CPA
firm than with other lines of professional work?
A. Integrity.
B. Competence.
C. Independence.
D. Keeping informed on current professional
developments.
Kom verder. Saxion.

Question 22.
Which of the following attributes is more closely
associated with attestation services performed by a CPA
firm than with other lines of professional work?
A. Integrity.
B. Competence.
C. Independence.
D. Keeping informed on current professional
developments.
Kom verder. Saxion.

Question 23.
Analytical procedures are most likely to detect:
A. Weaknesses of a material nature in internal control
B. Unusual transactions
C. Noncompliance with prescribed control activities
D. Improper separation of accounting and other
financial duties
Kom verder. Saxion.

Question 23.
Analytical procedures are most likely to detect:
A. Weaknesses of a material nature in internal control
B. Unusual transactions
C. Noncompliance with prescribed control activities
D. Improper separation of accounting and other
financial duties
Kom verder. Saxion.

Question 24.
An abnormal fluctuation in gross profit that might
suggest the need for extended audit procedures for
sales and inventories would most likely be identified in
the risk assessment phase of the audit by the use of:
A. Tests of transactions and balances.
B. An assessment of internal control.
C. Specialized audit programs.
D. Analytical procedures.
Kom verder. Saxion.

Question 24.
An abnormal fluctuation in gross profit that might
suggest the need for extended audit procedures for
sales and inventories would most likely be identified in
the risk assessment phase of the audit by the use of:
A. Tests of transactions and balances.
B. An assessment of internal control.
C. Specialized audit programs.
D. Analytical procedures.
Kom verder. Saxion.

Question 25.
• Assume that you have been assigned to the
audit of Williamson Manufacturing Company.
You have completed the procedures for
gathering information about the company and
its environment, including internal control.
Kom verder. Saxion.

Question 25.a
Describe the next stage of the audit process.

Assess the risk of material misstatement and

design further audit procedures (substantive
procedures and tests of controls).
Kom verder. Saxion.

Question 25.b
Explain how the auditors may respond to high risk
audit engagements and high risk financial
statement assertions.

Possible responses to high risk audit engagements

or high risk assertions include:
• Staff the engagement (audit area) with more
experienced individuals or individuals with
specialized knowledge.
• Adjust the timing of audit procedures to nearer
to year end.
• Perform more effective audit procedures.
• Increase the extent of items tested.
Kom verder. Saxion.

Question 25.c
Describe the nature of further audit procedures,
and explain the situation in which the procedures
should include tests of controls.

Further audit procedures include substantive

procedures and also tests of controls when the
audit plan assumes that the controls are operating
effectively or substantive procedures alone cannot
provide sufficient evidence for a particular
assertion.
 Good luck!

Kom verder. Saxion.