Chapter 05 - TEST BANK PDF

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TEST BANK...

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Chapter 05 Student: ___________________________________________________________________________ 1. Who is responsible for the preparation of the financial report? A. Auditor. B. Management. C. Both auditor and management. D. None of the answers given are correct.

2. Which audit assertion relates to ensuring that all recorded sales are valid? A. Existence. B. Completeness. C. Occurrence. D. Valuation and allocation.

3. Which of the following audit objectives relates primarily to the financial report assertion, valuation and allocation? A. Inventory listings are accurately compiled and the totals are properly included in the inventory accounts. B. Inventory quantities include all products, materials and supplies owned by the company that are in transit. C. Slow-moving, excess, defective and obsolete items included in inventories are properly identified. D. Inventories exclude items billed to customers or owned by others.

4. Which of the following is not a financial report assertion? A. Inspection. B. Rights and obligations. C. Valuation and allocation. D. Existence.

5. Your audit client is a shop that sells some of its own merchandise and some merchandise held on consignment. Which account balance assertion for inventory would you be most concerned about verifying? A. Existence. B. Completeness. C. Rights and obligations. D. Valuation and allocation.

6. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for purchases are you most concerned with? A. Occurrence. B. Completeness. C. Classification. D. Accuracy.

7. As part of accounts payable testing, an auditor reviews cash payments made post balance date. This is done mainly to gain evidence about the: A. valuation and allocation assertion. B. rights and obligations assertion. C. completeness assertion. D. existence assertion.

8. This is your first audit of XYZ Ltd. During the initial planning you have discovered that the client lacks receiving reports and a policy as to the timing within which to record purchases. You have also observed that there are many adjusting entries to accounts payable, which is a material balance. The audit assertion most at risk when auditing accounts payable is:

A. B. C. D.

existence. valuation and allocation. completeness. rights and obligations.

9. Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness? A. Comparing a sample of shipping documents to related sales invoices. B. Reviewing a standard bank confirmation. C. Confirming a sample of recorded receivables by direct communication with the debtors. D. Observing the client's distribution of payroll cheques.

10. Which of the following audit objectives relates primarily to the financial report assertion, rights and obligations? A. Inventories are properly classified in the statement of financial position as current assets. B. Inventories exclude items billed to customers or owned by others. C. Slow-moving, excess, defective and obsolete items included in inventories are properly identified. D. Inventory quantities include all products, materials and supplies owned by the company.

11. While undertaking the audit of the inventory balance, you use your audit software to extract, from the inventory master file, a report that shows those with a negative gross margin. The financial report assertion at which such a report is aimed is:

A. B. C. D.

existence. valuation and allocation. occurrence. completeness.

12. Which of the following audit objectives relates primarily to the financial report assertion of presentation and disclosure—classification and understandability? A. Inventories are included in the statement of financial position as current assets. B. Inventories exclude items billed to customers or owned by others. C. Inventories are included in the statement of financial position at the lower of cost and net realisable value. D. Inventory quantities include all products, materials and supplies owned by the company that are in transit.

13. Which of the following audit objectives does not relate primarily to the financial report assertion of completeness? A. Inventories are reduced, when appropriate, to net realisable value. B. Inventory quantities include all products, materials and supplies on hand. C. Inventory listings are accurately compiled and the totals are properly included in the inventory accounts. D. Inventory quantities include products and materials owned by the company that are in transit or stored at outside locations.

14. When reviewing a loan agreement to ascertain whether the bank's security over any of the client's assets has been included in the financial report, the audit assertion being achieved is: A. valuation and allocation. B. completeness. C. presentation and disclosure— accuracy and valuation. D. presentation and disclosure —completeness.

15. Which of the following does NOT assist in the achievement of the audit assertion of existence in relation to an investment in listed shares? A. A confirmation of shares held on the client's behalf. B. A review of share prices quoted at the financial year-end. C. A test of details of transactions of share purchases and sales during the year. D. An analytical review of rate of return on investments.

16. In testing the existence assertion for an asset, an auditor ordinarily works from the: A. potentially unrecorded items to the financial report. B. financial report to the potentially unrecorded items. C. supporting evidence to the accounting records. D. accounting records to the supporting evidence.

17. Selecting a sample of quantities of inventory in the warehouse and tracing each item to the final stock sheets helps address which of the following assertions in respect of inventory? A. Completeness. B. Valuation and allocation. C. Existence. D. Rights and obligations.

18. Auditors are most likely to use focused audit procedures to examine: A. routine transactions. B. low-risk assertions. C. only the rights and obligations assertion. D. high-risk assertions.

19. Your audit client is under intense pressure to meet an earnings target. Which audit procedure are you most likely to use when auditing purchases? A. Vouching. B. Tracing. C. Recalculation. D. Confirmation.

20. In the context of an audit of a financial report, substantive tests are audit procedures that: A. may be eliminated under certain conditions. B. are designed to discover significant subsequent events. C. may be either tests of details of transactions, tests of details of account balances, tests of disclosure, or analytical procedures. D. will increase proportionately with the auditor's reliance on internal control.

21. Most of the independent auditor's work in formulating an opinion on a financial report consists of: A. obtaining an understanding of the internal control. B. obtaining and examining audit evidence. C. examining cash transactions. D. comparing recorded accountability with assets.

22. You are concerned about whether all sales have occurred. The procedure that will be most effective in verifying this assertion is: A. selecting a sample of invoices and tracing them to delivery dockets. B. selecting a sample of customers' orders and tracing them to delivery dockets. C. checking the sequence of delivery dockets and tracing them to customers' orders. D. selecting a sample of delivery dockets and tracing them to invoices.

23. The audit trail includes all of the following except: A. journals and journal files. B. segregation of duties. C. ledgers and ledger files. D. source documents and transaction files.

24. Which of the following is not an auditing procedure? A. Physical examination. B. Disclosure. C. Vouching. D. Confirmation.

25. In a financial report audit, substantive tests are audit procedures that: A. a re designed to discover significant subsequent events. B. may be either tests of transactions, tests of balances, tests of disclosure or analytical procedures. C. will decrease proportionately with the auditor's assessed level of control risk. D. may be eliminated under certain conditions.

26. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must: A. be well documented and cross-referenced in the audit documents. B. be based on sources that are considered reliable. C. bear a direct relationship to the audit objective. D. be of a quantity to enable the auditor to form an opinion.

27. In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events and specifically, which assertion?

A. B. C. D.

Occurrence. Cut-off. Accuracy. Classification.

28. Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence. B. Completeness. C. Cut-off. D. Classification.

29. Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence. B. Completeness. C. Authorisation. D. Classification.

30. In determining whether transactions have been recorded, the direction of the audit testing should be from the: A. general ledger balances. B. adjusted trial balance. C. original source documents. D. general journal entries.

31. Which of the following presumptions is correct about the reliability of audit evidence? A. Information obtained indirectly from outside sources is the most reliable audit evidence. B. To be reliable, audit evidence should be convincing rather than persuasive. C. Reliability of audit evidence refers to the amount of corroborative evidence obtained. D. An effective internal control system provides more reliable audit evidence than does an ineffective internal control system.

32. The following statements were made in a discussion of audit evidence between two auditors. Which statement is not valid concerning audit evidence? A. 'I am seldom convinced beyond all doubt with respect to all aspects of the reports being examined.' B. 'I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence.' C. 'I evaluate the degree of risk involved in deciding the kind of evidence I will gather.' D. 'I evaluate the usefulness of the evidence I can obtain against the cost of obtaining it.'

33. Which of the following statements concerning evidence is correct? A. Appropriate evidence supporting management's assertions must be convincing rather than merely persuasive. B. A client's accounting data cannot be considered sufficient audit evidence to support the financial report. C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained. D. Effective internal control contributes little to the reliability of the evidence created within the entity.

34. Which of the following is the least persuasive documentation in support of an auditor's opinion? A. Schedules of details of physical inventory counts conducted by the client. B. Notation of inferences drawn from ratios and trends. C. Notation of appraisers' conclusions documented in the auditor's work papers. D. Lists of negative confirmation requests for which the auditor received no response.

35. Which of the following factors is most important in determining the appropriateness of audit evidence? A. The reliability of the evidence in meeting the audit objective. B. The sampling method used by the auditor. C. The quantity of the evidence obtained. D. The objectivity of the auditor gathering the evidence.

36. To be appropriate, evidence must be both: A. reliable and well documented. B. reliable and relevant. C. useful and independent. D. extensive and timely.

37. The weakest form of audit evidence among the following is: A. a letter of representation from management. B. confirmation of an inter-company receivable from a related company. C. a letter of representation from the client's solicitors. D. a bank statement.

38. Evidence is reliable if it: A. signals the true state of an assertion. B. applies to the period being audited. C. relates to the audit objective being tested. D. corroborates management's assertions.

39. An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of details usually is determined by the: A. availability of data aggregated at a high level. B. relative effectiveness and efficiency of the tests. C. timing of tests performed after the balance date. D. auditor's familiarity with industry trends.

40. Which of the following statements relating to the appropriateness of audit evidence is always true? A. Evidence gathered by an auditor from outside an entity is reliable. B. Accounting data developed under a satisfactory internal control are more relevant than data developed under unsatisfactory internal control conditions. C. Oral representations made by management are not valid evidence. D. Evidence gathered by auditors must be both reliable and relevant to be considered appropriate.

41. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence? A. Documents mailed by outsiders to the auditor. B. Correspondence between the auditor and suppliers. C. Sales invoices inspected by the auditor. D. Calculations made by the auditor.

42. The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist is: A. audit risk. B. detection risk. C. control risk. D. inherent risk

43. Which of the following audit risk components may be assessed in non-quantitative terms?

Control risk

Detection risk

Inherent risk

A. Yes

Yes

Yes

No

Yes

Yes

No

Yes

Yes

B. Yes

C. Yes

D. No

44. Auditors can eliminate engagement risk: A. under no circumstances. B. by establishing policies for client acceptance and continuance. C. by lowering audit risk. D. by lowering materiality.

45. The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as: A. sampling risk. B. detection risk. C. non-sampling risk. D. inherent risk.

46. As the acceptable level of detection risk decreases, an auditor may change the: A. timing of substantive tests by performing them at an interim date rather than at balance date. B. assessed level of inherent risk to a higher amount. C. timing of tests of controls by performing them at several dates rather than at one time. D. nature of substantive tests from a less effective to a more effective procedure.

47. As the acceptable level of detection risk decreases, an auditor may change the: A. timing of substantive tests by performing them at an interim date rather than at year-end. B. nature of substantive tests from less effective to more effective procedures. C. timing of tests of controls by performing them at several dates rather than at one time. D. assessed level of inherent risk to a higher amount.

48. As the acceptable level of detection risk decreases, the assurance directly provided from: A. substantive tests should increase. B. substantive tests should decrease. C. tests of controls should increase. D. tests of controls should decrease.

49. As the acceptable level of detection risk increases, an auditor may change the: A. assessed level of control risk from less than high to high. B. assurance provided by tests of controls by using a larger sample size than planned. C. timing of substantive tests from year-end to an interim date. D. nature of substantive tests from less effective to more effective procedures.

50. The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process. In regard to minimising this risk, the auditor primarily relies on: A. substantive tests. B. tests of controls. C. internal control. D. statistical analysis.

51. The situation and circumstances can dictate the level of certain risks no matter what the auditor does. However, the auditor is always able to decide to reduce one of the following risks: A. control risk. B. risk of management fraud. C. detection risk. D. inherent risk.

52. The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily: A. opposite. B. inverse. C. direct. D. unequal.

53. Which of the following best describes the concept of audit risk? A. The risk of the auditor being sued because of association with an audit client. B. The risk that the auditor will provide an unmodified opinion on a materially misstated financial report. C. The overall risk that a material misstatement exists in the financial report. D. The risk that auditors use audit procedures that are inappropriate.

54. Engagement risk is: A. the risk of issuing an incorrect auditor's opinion. B. the auditor's risk of loss from events arising in connection with the financial report audited and reported upon. C. the overall risk of material misstatements. D. the risk of entity financial failure.

55. Inherent risk and control risk differ from detection risk in that they: A. arise from the misapplication of auditing procedures. B. may be assessed in either quantitative or non-quantitative terms. C. exist independently of the financial report audit. D. can be changed at the auditor's discretion.

56. Which of the following is intended to detect deviations from prescribed Accounting Department procedures? A. Substantive tests specified by a standardised audit program. B. Tests of controls designed specifically for the client. C. Analytical tests as designed in the industry audit guide. D. Computerised analytical tests tailored for the configuration of CIS equipment in use.

57. Which of the following would be least likely to be included in an auditor's test of controls? A. Observation. B. Inquiry. C. Confirmation. D. Inspection.

58. All of the following are substantive tests except: A. analytical procedures. B. tests of approvals on invoices. C. direct tests of sales transactions. D. confirmation of bank balances at year-end.

59. 'Dual-purpose tests' is a term used for: A. tests of controls that address both the design of the control procedures and their operating effectiveness. B. tests of transactions that include substantive procedures as well as tests of controls. C. tests that address both balances and transaction classes. D. tests performed because of client expectations as well as for gathering audit evidence.

60. Which of the following statements concerning the auditor's use of the work of an expert is correct? A. If the auditor believes that the determinations made by the expert are unreasonable, only an adverse opinion may be issued. B. If the expert is related to the client, the auditor is not permitted to use the expert's findings as corroborative evidence. C. The expert should be identified in the auditor's report if the auditor has relied on the expert in issuing an unmodified auditor's opinion. D. The expert should have an understanding of the auditor's corroborative use of the expert's findings.

61. Audit documentation prepared on audits of publicly-held clients is the...