Module 4 - Responding to Risk Assessment PDF

Preview

Summary

Download Module 4 - Responding to Risk Assessment PDF

Description

MODULE 4

RESPONDING TO RISK ASSESSMENT

113

RESPONDING TO RISK ASSESSMENT: EVIDENCE ACCUMULATION AND EVALUATION MULTIPLE-CHOICE QUESTIONS (1-169)

1. Which of the following best describes what is meant by the term generally accepted auditing standards? a. Procedures to be used to gather evidence to support financial statements. . Measures of the quality of the auditor’s performance. c. Pronouncements issued by the Auditing Standards Board. d. Rules acknowledged by the accounting profession because of their universal application. 2. Which of the following is not an assertion relating to classes of transactions? a. Accuracy. Consistency. c. Cutoff. d. Occurrence. 3. Which of the following is a general principle relating to the reliability of audit evidence? a. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by the auditor. b. Audit evidence provided by copies is more reliable than that provided by facsimiles. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than audit evidence obtained from nonindependent sources. d. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls. 4. Which of the following types of audit evidence is the most persuasive? a. Prenumbered client purchase order forms. b. Client work sheets supporting cost allocations. Bank statements obtained from the client. d. Client representation letter. 5. 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. Effective internal control provides more assurance about the reliability of audit evidence. 6. Which of the following statements relating to the appropriateness of audit evidence is always true? a. Audit evidence gathered by an auditor from outside an enterprise is reliable. b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. c. Oral representations made by management are not valid evidence.

Evidence gathered by auditors must be both valid and relevant to be considered appropriate. 7. Which of the following types of audit evidence is the least persuasive? Prenumbered purchase order forms. b. Bank statements obtained from the client. c. Test counts of inventory performed by the auditor. d. Correspondence from the client’s attorney about litigation. 8. In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are Susceptible to bias. b. Consistent with prior periods. c. Insensitive to variations. d. Similar to industry guidelines. 9. Which of the following is not a basic procedure used in an audit? a. Risk assessment procedures. b. Substantive procedures. c. Tests of controls. Tests of direct evidence. 10. Which of the following procedures would an auditor ordinarily perform first in evaluating management’s accounting estimates for reasonableness? a. Develop independent expectations of management’s estimates. b. Consider the appropriateness of the key factors or assumptions used in preparing the estimates. c. Test the calculations used by management in developing the estimates. Obtain an understanding of how management developed its estimates. 11. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are a. Consistent with prior periods. b. Similar to industry guidelines. c. Objective and not susceptible to bias. Deviations from historical patterns. 12. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are a. Not subject to bias. b. Consistent with industry guidelines. c. Based on objective assumptions. Reasonable in the circumstances. 13. In testing the existence assertion for an asset, an auditor ordinarily works from the a. Financial statements to the potentially unrecorded items. b. Potentially unrecorded items to the financial statements. . Accounting records to the supporting evidence. d. Supporting evidence to the accounting records.

114

MODULE 4

RESPONDING TO RISK ASSESSMENT

14. A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year-end, the auditor would be most concerned about Suspense debits that management believes will benefit future operations. b. Suspense debits that the auditor verifies will have realizable value to the client. c. Suspense credits that management believes should be classified as “Current liability.” d. Suspense credits that the auditor determines to be customer deposits. 15. Which of the following would not be considered an analytical procedure? a. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. c. Computing accounts receivable turnover by dividing credit sales by the average net receivables. d. Developing the expected current year sales based on the sales trend of the prior five years. 16. What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonpublic entity? a. Trend analysis. b. Regression analysis. c. Ratio analysis. d. Risk analysis. 17. An auditor may achieve audit objectives related to particular assertions by . Performing analytical procedures. b. Adhering to a system of quality control. c. Preparing auditor working papers. d. Increasing the level of detection risk. 18. An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this fraudulent financial reporting by a. Tracing a sample of journal entries to the general ledger. b. Evaluating the effectiveness of internal control. c. Investigating the reconciliations between controlling accounts and subsidiary records. Performing analytical procedures designed to disclose differences from expectations. 19. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? a. Accounts receivable. b. Interest expense. c. Accounts payable. d. Travel and entertainment expense. 20. Analytical procedures used in the overall review stage of an audit generally include

a. b.

d.

Gathering evidence concerning account balances that have not changed from the prior year. Retesting control procedures that appeared to be ineffective during the assessment of control risk. Considering unusual or unexpected account balances that were not previously identified. Performing tests of transactions to corroborate management’s financial statement assertions.

21. Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? a. Relationships involving balance sheet accounts. b. Transactions subject to management discretion. Relationships involving income statement accounts. d. Data subject to audit testing in the prior year. 22. A basic premise underlying the application of analytical procedures is that a. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. b. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. d. These procedures cannot replace tests of balances and transactions. 23. For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent

b. c. d.

In the planning stage Yes No No Yes

As a substantive test No Yes Yes No

In the review stage Yes No Yes No

24. An auditor’s analytical procedures most likely would be facilitated if the entity a. Segregates obsolete inventory before the physical inventory count. . Uses a standard cost system that produces variance reports. c. Corrects material weaknesses in internal control before the beginning of the audit. d. Develops its data from sources solely within the entity. 25. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that a. Irregularities exist among the relevant account balances. b. Internal control activities are not operating effectively. Additional tests of details are required. d. The communication with the audit committee should be revised.

MODULE 4

RESPONDING TO RISK ASSESSMENT

26. Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses? a. The current year’s accounts receivable with the prior year’s accounts receivable. The current year’s payroll expense with the prior year’s payroll expense. c. The budgeted current year’s sales with the prior year’s sales. d. The budgeted current year’s warranty expense with the current year’s contingent liabilities. 27. To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by a. The staff accountant who performed the substantive auditing procedures. b. The managing partner who has responsibility for all audit engagements at that practice office. . A manager or partner who has a comprehensive knowledge of the client’s business and industry. d. The CPA firm’s quality control manager or partner who has responsibility for the firm’s peer review program. 28. Which of the following is the best example of a substantive test? a. Examining a sample of cash disbursements to test whether expenses have been properly approved. Confirmation of balances of accounts receivable. c. Comparison of signatures on checks to a list of authorized signers. d. Flowcharting of the client’s cash receipts system. 29. The objective of tests of details of transactions performed as substantive tests is to a. Comply with generally accepted auditing standards. b. Attain assurance about the reliability of the accounting system. c. Detect material misstatements in the financial statements. d. Evaluate whether management’s policies and procedures operated effectively.

b. c.

115

Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances. Vouch all bank transfers for the last week of the year and first week of the subsequent year. Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts.

33. 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. Original source documents. d. General journal entries. 34. Which statement is correct concerning the deletion of audit documentation? a. Superseded audit documentation should always be deleted from the audit file. . After the audit file has been completed, the auditor should not delete or discard audit documentation. c. Auditors should use professional skepticism in determining which audit documentation should be deleted. d. Audit documentation should never be deleted from the audit file. 35. Ignoring any particular legal or regulatory requirement, audit documentation should be retained A minimum of five years. b. As long as lead schedules have relevance to forthcoming audits. c. Until 3 years after the client selects another auditor. d. Working papers must be maintained indefinitely. 36. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? Notes receivable and interest income. b. Accrued interest receivable and accrued interest payable. c. Notes payable and notes receivable. d. Interest income and interest expense.

30. In the context of an audit of financial statements, substantive tests are audit procedures that a. May be eliminated under certain conditions. b. Are designed to discover significant subsequent events. May be either tests of transactions, direct tests of financial balances, or analytical tests. d. Will increase proportionately with the auditor’s reliance on internal control.

37.

31. The auditor will most likely perform extensive tests for possible understatement of a. Revenues. b. Assets. Liabilities. d. Capital.

38. The permanent file of an auditor’s working papers generally would not include a. Bond indenture agreements. b. Lease agreements. Working trial balance. d. Flowchart of internal control.

32. Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? a. Compare the amounts included in the statement of cash flows to similar amounts in the prior year’s statement of cash flows.

39. An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for a. Cash flow increases and decreases. b. Audit objectives and assertions.

An auditor’s working papers serve mainly to . Provide the principal support for the auditor’s report. b. Satisfy the auditor’s responsibilities concerning the Code of Professional Conduct. c. Monitor the effectiveness of the CPA firm’s quality control procedures. d. Document the level of independence maintained by the auditor.

116

MODULE 4

d.

RESPONDING TO RISK ASSESSMENT

Reclassifications and adjustments. Reconciliations and tick marks.

40. Which of the following is least likely to be a factor in the auditor’s decision about the extent of the documentation of a particular audit area? a. The risk of material misstatement. b. The extent of the judgment involved in performing the procedures. c. The nature and extent of exceptions identified. Whether or not the client has an internal audit function. 41. Which of the following is required documentation in an audit in accordance with generally accepted auditing standards? a. A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting. An audit program setting forth in detail the procedures necessary to accomplish the engagement’s objectives. c. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. d. An internal control questionnaire identifying controls that assure specific objectives will be achieved. 42. Which of the following factors most likely would affect an auditor’s judgment about the quantity, type, and content of the auditor’s working papers? . The assessed level of control risk. b. The likelihood of a review by a concurring (second) partner. c. The number of personnel assigned to the audit. d. The content of the management representation letter. 43. The audit working paper that reflects the major components of an amount reported in the financial statements is the a. Interbank transfer schedule. b. Carryforward schedule. c. Supporting schedule. Lead schedule. 44. Which of the following documentation is required for an audit in accordance with generally accepted auditing standards? a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity’s controls. b. A client engagement letter that summarizes the timing and details of the auditor’s planned fieldwork. An indication in the working papers that the accounting records agree or reconcile with the financial statements. d. The basis for the auditor’s conclusions when the assessed level of control risk is at the maximum level for all financial statement assertions.

45. the

No deletions of audit documentation are allowed after a. b. c. d.

Client’s year-end. Documentation completion date. Last date of significant fieldwork. Report release date.

46. Under the requirements of the PCAOB, audit documentation must contain sufficient information to allow what type of auditor to understand the nature, timing, extent, and results of procedures performed? a. An experienced audit team member. b. An experienced auditor having no previous connection with the engagement. c. Any certified public accountant. d. An auditor qualified as a peer review specialist. 47. Audit documentation for audits performed under the requirements of the Public Company Accounting Oversight Board should be retained for a. The shorter of five years, or the period required by law. b. Seven years. The longer of seven years, or the period required by law. d. Indefinitely. 48. Which of the following sets of information does an auditor usually confirm on one form? a. Accounts payable and purchase commitments. Cash in bank and collateral for loans. c. Inventory on consignment and contingent liabilities. d. Accounts receivable and accrued interest receivable. 49. The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may a. Not believe that the bank is obligated to verify confidential information to a third party. b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation. c. Not have access to the client’s cutoff bank statement. Be unaware of all the financial relationships that the bank has with the client. 50. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting a. Opening and closing inventory balances. Cash receipts and accounts receivable. c. Shipping and receiving activities. d. Cutoffs of sales and purchases.

Items 51 and 52 are based on the following: The information below was taken from the bank transfer schedule prepared during the audit of Fox Co.’s financial statements for the year ended December 31, 2005. Assume all checks are dated and issued on December 30, 2005.

MODULE 4 Bank accounts Check no. 101 202 303 404 51.

From National County Federal State

To Federal State American Republic

Disbursement date Per Per books bank Dec. 30 Jan. 4 Jan. 3 Jan. 2 Dec. 31 Jan. 3 Jan. 2 Jan. 2

Which of the following checks might indicate kiting? a. #101 and #303. b. #202 and #404. c. #101 and #404. d. #202 and #303.

53. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether a. The cash receipts journal was held open for a few days after the year-end. b. The last checks recorded before the year-end were actually mailed by the year-end. c. Cash balances were overstated because of kiting. d. Any unusual payments to or receipts from related parties occurred. 54. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except a. Cutoff bank statement. b. Year-end bank statement. c. Bank confirmation. d. General ledger. 55. Which of the following cash transfers results in a misstatement of cash at December 31, 2005?

Transfer a. c. d.

117

RESPONDING TO...