Acc403 Auditing and Assurance Services: Week 11 Final Exam - Version 1 (55 MCQs)

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Acc403 Auditing and Assurance Services
Week 11 Final Exam (Chapters 9-17, 21 and 24) - Version 1

Part 1

Question 1
If an auditor establishes a relatively high level for materiality, then the auditor will:
A) accumulate more evidence than if a lower level had been set.
B) accumulate less evidence than if a lower level had been set.
C) accumulate approximately the same evidence as would be the case were materiality lower.
D) accumulate an undetermined amount of evidence.

Question 2
To what extent do auditors typically rely on internal controls of their public company clients?
A) Extensively
B) Only very little
C) Infrequently
D) Never

Question 3
Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files.
A) permit
B) do not allow
C) require
D) strongly encourage

Question 4
The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as:
A) audit risk.
B) inherent risk.
C) sampling risk.
D) detection risk

Question 5
As the risk of material misstatement increases, detection risk should:
A) medium increase.
B) decrease.
C) stay the same.
D) Is indeterminate

Question 6
Reasonable assurance allows for:
A) low likelihood that material misstatements will not be prevented or detected by internal controls.
B) no likelihood that material misstatements will not be prevented or detected by internal control.
C) moderate likelihood that material misstatements will not be prevented or detected by internal control.
D) high likelihood that material misstatements will not be prevented or detected by internal

Question 7
Audit evidence regarding the separation of duties is normally best obtained by:
A) preparing flowcharts of operational processes.
B) preparing narratives of operational processes.
C) observation of employees applying control activities.
D) inquiries of employees applying control activities.

Question 8
When one material weakness is present at the end of the year, management of a public company must conclude that internal control over financial reporting is:
A) insufficient.
B) inadequate.
C) ineffective.
D) inefficient.

Question 9
The auditors primary purpose in auditing the client's system of internal control over financial reporting is:
A) to prevent fraudulent financial statements from being issued to the public.
B) to evaluate the effectiveness of the company's internal controls over all relevant assertions in the financial statements.
C) to report to management that the internal controls are effective in preventing misstatements from appearing on the financial statements.
D) to efficiently conduct the Audit of Financial Statements.

Question 10
A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is:
A) identify the absence of key controls.
B) consider the possibility of compensating controls.
C) determine potential misstatements that could result.
D) identify existing controls.

Question 11
When assessing the risk for fraud, the auditor must be cognizant of the fact that:
A) the existence of fraud risk factors means fraud exists.
B) analytical procedures must be performed on revenue accounts.
C) horizontal analysis is not useful in helping to determine unusual financial statement relationships.
D) the auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities.

Question 12
Which of the following is a factor that relates to incentives to misappropriate assets?
A) Significant accounting estimates involving subjective judgments
B) Significant personal financial obligations
C) Management's practice of making overly aggressive forecasts
D) High turnover of accounting, internal audit and information technology staff

Question 13
Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings.
A) income smoothing
B) cookie jar reserves
C) cash
D) sales

Question 14
Research indicates that the most effective way to prevent and deter fraud is to:
A) implement programs and controls that are based on core values embraced by the company.
B) hire highly ethical employees.
C) communicate expectations to all employees on an annual basis.
D) terminate employees who are suspected of committing fraud

Question 15
Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?
A) Significant accounting estimates involving subjective judgments
B) Excessive pressure for management to meet debt repayment requirements
C) Management's practice of making overly aggressive forecasts
D) High turnover of accounting, internal audit, and information technology staff

Question 16
Auditors should evaluate which of the following before evaluating application controls because of the
potential for pervasive effects?
A) Input controls
B) Control environment
C) Processing controls
D) General controls

Question 17
An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:
A) time tickets with invalid job numbers.
B) overtime not approved by supervisors.
C) deductions not authorized by employees.
D) payroll checks with unauthorized signatures.

Question 18
The auditor's objective in determining whether the client's automated controls can correctly handle valid and invalid transactions as they arise is accomplished through the:
A) Test data approach
B) Generalized audit software approach
C) Microcomputer-aided auditing approach
D) Generally accepted auditing standards

Question 19
An internal control deficiency occurs when computer personnel:
A) Participate in computer software acquisition decisions
B) Design flowcharts and narratives for computerized systems
C) Originate changes in customer master files
D) Provide physical security over program files

Question 20
Which of the following is a component of general controls?
A) Processing controls
B) Output controls
C) Back-up and contingency planning
D) Input controls

Question 21
The auditor would design which of the following audit tests to detect possible monetary errors in the financial statements?
A) Control tests
B) Analytical procedures
C) Risk assessment procedures
D) Tests of operating effectiveness of controls over revenue and cash

Question 22
Many auditors perform extensive analytical procedures on audits because:
A) they are required by GAAS.
B) they pinpoint errors in accounts.
C) they indicate areas of potential risk and misstatement.
D) they are required for tests of controls.

Question 23
Analytical procedures:
A) involve comparisons of recorded amounts to expectations developed by management.
B) are only performed during the planning stage of the audit.
C) are required to be performed when auditing an account balance.
D) provide substantive evidence.

Question 24
Transaction related audit objectives would most likely be performed in which phase of the audit process?
A) Plan and design audit approach
B) Perform audit tests for controls and transactions
C) Perform analytical procedures and tests of balances
D) Complete the audit and issue the audit report

Question 25
The document that details the specific audit procedures for each type of test is the:
A) audit strategy.
B) audit program.
C) audit procedure.
D) audit risk model.

Part 2

Question 1
Before goods are shipped on account, a properly authorized person must:
A) prepare the sales invoice.
B) approve the journal entry.
C) approve the customer's credit.
D) verify that the unit price is accurate.

Question 2
Generally, when is the earliest point in the sales and collection cycle in which revenue can be recognized?
A) When the sale is approved
B) When the credit approval process is finalized
C) When the cash is collected
D) When the goods have been shipped

Question 3
To test for recorded sales for which there were no actual shipments, the auditor vouches from the:
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

Question 4
A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
A) bill of lading.
B) sales invoice.
C) picking ticket.
D) vendor invoice.

Question 5
Which of the following is not a business function within the "Sales" class of transactions?
A) Processing customer orders
B) Granting credit
C) Processing and recording sales returns and allowances
D) Shipping goods

Question 6
Which of the following is the exception rate that the auditor expects to find before testing?
A) Sample exception rate
B) Estimated population exception rate
C) Computed exception rate
D) Tolerable exception rate

Question 7
Which of the following is the risk that audit tests will not uncover existing exceptions in a sample?
A) Sampling risk
B) Nonsampling risk
C) Audit risk
D) Detection risk

Question 8
When the auditor goes through a population and selects items using nonprobabilistic selection methods, without regard to their size, source, or other distinguishing characteristics, it is called:
A) block sample selection.
B) haphazard selection.
C) systematic sample selection.
D) statistical selection

Question 9
A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a:
A) random sample.
B) statistical sample.
C) judgment sample.
D) representative sample

Question 10
One of the causes of nonsampling risk is:
A) improper supervision and instruction of the client's employees.
B) ineffective audit procedures.
C) inadequate sample size.
D) exceptions being found in the sample

Question 11
Which of the following is the principle "weakness" of using negative confirmations for your tests of details of balances for accounts receivable?
A) They can only be used for large balance accounts.
B) They cannot not be used when account balances "bunch" around a mean value.
C) Conclusions drawn from receiving no reply may not be correct.
D) Response rates are generally too low to draw any conclusions.

Question 12
For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:
A) is detected and correct when cash is separately audited.
B) is unlikely to have a material impact on the balance sheet or the income statement.
C) affects items on the balance sheet but does not affect net income.
D) rarely occurs given the control consciousness of most entities.

Question 13
Audit procedures designed to uncover credit sales made after the client's fiscal year end that relate to the current year being audited provide evidence for which of the following audit objective?
A) Realizable value
B) Accuracy
C) Cutoff
D) Existence

Question 14
The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is:
A) confirmations.
B) recalculation of the aged receivables and uncollectible accounts.
C) tracing credit memos for returned merchandise to receiving room reports.
D) tracing from shipping documents to journals to the accounts receivable ledger.

Question 15
Which of the following most likely would be detected by a review of a client's sales cutoff?
A) Excessive sales discounts
B) Unrecorded sales for the year
C) Unauthorized goods returned for credit
D) Lapping of year-end accounts receivable

Question 16
In monetary unit sampling, a sampling interval of 900 means that:
A) every 900th item will be selected.
B) every 900th dollar in the account will be sampled.
C) expected misstatement is 900.
D) tolerable misstatement is 900.

Question 17
You are auditing Nelson and Company and determined that the sample results support a conclusion that the account is materially misstated, when in fact it was not misstated. This illustrates the risk of:
incorrect acceptance. 

control risk too low.
control risk too high. 

incorrect rejection.

Question 18
The auditor is concerned with the audited value rather than the error amount of each item in the sample when using:
A) Difference estimation
B) Mean-per-unit estimation
C) Ratio estimation
D) Monetary-unit sampling

Question 19
Monetary unit sampling is not particularly effective at detecting:
A) overstatements.
B) understatements.
C) errors in current assets.
D) errors in noncurrent assets.

Question 20
In estimating the population misstatement, the first step in projecting from the sample to the population is to:
A) make a point estimate.
B) revise the upper error bound.
C) calculate the precision interval.
D) determine the population mean.

Question 21
A major difficulty in the verification of inventory cost records for the purpose of inventory valuation is in determining the reasonableness of the:
A) manufacturing overhead costs.
B) direct labor hourly rate.
C) raw material per unit cost.
D) number of direct labor hours applied

Question 22
There must be a periodic physical count by the client of the inventory items on hand:
A) only if the client uses the LIFO method
B) only if the client uses a lower-of-cost-or-market method
C) regardless of the client’s inventory valuation method.
D) only if the client uses either the LIFO or FIFO method

Question 23
You are auditing the inventory account and are concerned about the possibility of an inventory overstatement. What is the best audit procedure to detect damaged inventory?
A)compare the condition of inventory from the previous years count to the current year
B)observe the condition of inventory during the clients physical count
C) compare inventory turnover from the previous years inventory to the current years inventory

Question 24
If the auditor concludes that physical controls over inventory are so inadequate that the inventory will be difficult to count, the auditor should ordinarily:
C) conduct expanded observation tests of physical inventory.

Question 25
Which of the following is not a function within the inventory and warehousing cycle?
A) Process the goods.
B) Store raw materials.
C) Ship finished goods.
D) Process invoices for shipped goods.

Question 26
A commitment is best described as:
A) an agreement to commit the firm to a set of fixed conditions in the future.
B) an agreement to commit the firm to a set of fixed conditions in the future that depends on company profitability.
C) an agreement to commit the firm to a set of fixed conditions in the future that depends on current market conditions.
D) a potential future obligation to an outside party for an as yet to be determined amount

Question 27
At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the:
A) management letter.
B) letter of inquiry.
C) letters testamentary.
D) management letter of representation.

Question 28
One of the primary approaches in dealing with uncertainties in loss contingencies uses a ________ threshold.
A) monetary
B) materiality
C) probability
D) analytical

Question 29
Which of the following subsequent events is most likely to result in an adjustment to a company's financial statements?
A) Merger or acquisition activities
B) Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance
C) Issuance of common stock
D) An uninsured loss of inventories due to a fire

Question 30
When should auditors generally assess a client's ability to continue as a going concern?
A) Upon completion of the audit
B) During the planning stages of the audit
C) Throughout the entire audit process
D) During testing and completion phases of the audit
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