Chapter 05 Audit Evidence and Documentation Answer Key 

 

True / False Questions 

1. The professional standards consider calculating depreciation expense a "routine" transaction. FALSE

 

Difficulty: Hard 

2. The most reliable form of documentary evidence generally is considered to be documents created by the client. FALSE

 

Difficulty: Medium 

3. A vendor's invoice is an example of documentary evidence created by a third party and held by the client. TRUE

 

Difficulty: Medium 

4. In performing analytical procedures, the auditors may use dollar amounts, physical quantities, or percentages. TRUE

 

Difficulty: Medium 

5. The primary purpose of a letter of representations is to obtain additional evidence about specific accounts. FALSE

 

Difficulty: Hard 

6. The auditors should propose an adjusting journal entry for all material related-party transactions. FALSE

 

Difficulty: Hard 

7. When the risk of material misstatement for an account is high, the auditors may perform additional substantive procedures to restrict detection risk to a lower level. TRUE

 

Difficulty: Medium 

8. Working papers of continuing audit interest usually are filed with the administrative working papers. FALSE

 

Difficulty: Medium 

9. The use of lead schedules is designed to increase the detail of the working trial balance. FALSE

 

Difficulty: Easy 

10. Adjusting journal entries are ordinarily recorded by the client, while reclassifying journal entries need not be recorded. TRUE

 

Difficulty: Medium 

Chapter 07 Internal Control Answer Key 

 

True / False Questions 

1. Internal control is concerned with the reliability of financial information. TRUE

 

Difficulty: Easy 

2. The Foreign Corrupt Practices Act prohibits bribes to foreign corporate officials to obtain business. FALSE

 

Difficulty: Hard 

3. Incompatible duties exist when an employee is in a position to perpetrate and conceal errors or fraud. TRUE

 

Difficulty: Easy 

4. Internal auditors should preferably report to the chief accounting officer of the company. FALSE

 

Difficulty: Medium 

5. Well-designed internal control will prevent all fraud by top management. FALSE

 

Difficulty: Easy 

6. CPA firms may use written narratives to describe internal control in their audit working papers. TRUE

 

Difficulty: Easy 

7. The auditors' communication of internal control significant deficiencies should be addressed only to senior management of the company. FALSE

 

Difficulty: Easy 

8. If the auditors' assessment of the design of internal control reveals that it cannot be relied upon, the auditors are not required to prepare any documentation of internal control for their working papers. FALSE

 

Difficulty: Medium 

9. The relatively low number of types of transactions incurred by small firms makes the segregation of duties impossible. FALSE

 

Difficulty: Easy 

10. In a financial statement audit, CPAs are required to assess the operating effectiveness of most significant accounting oriented controls. FALSE

Chapter 08 Consideration of Internal Control in an Information Technology Environment Answer Key 

 

True / False Questions 

1. Magnetic tape drives have the advantage of direct access to stored data. FALSE

 

Difficulty: Medium 

2. The operating system is an example of system software. TRUE

 

Difficulty: Medium 

3. For good internal control, programmers should not be given access to complete program documentation for the programs they work on. FALSE

 

Difficulty: Medium 

4. Data encryption is an example of data transmission control. TRUE

 

Difficulty: Medium 

5. Internal file labels are designed to prevent errors by programmers. FALSE

 

Difficulty: Medium 

6. For auxiliary storage when the computer is operating, personal computers use hard disk drives. TRUE

 

Difficulty: Medium 

7. Distributive data processing eliminates the need for data security. FALSE

 

Difficulty: Easy 

8. Most advanced computer systems do not have audit trails. FALSE

 

Difficulty: Medium 

9. Auditors usually begin their consideration of IT systems with tests of application controls. FALSE

 

Difficulty: Hard 

10. Generalized audit software may be used for substantive tests or for tests of controls. TRUE

 

Difficulty: Medium 

Chapter 09 Audit Sampling Answer Key 

 

True / False Questions 

1. Stratification of the population generally results in a more efficient sampling plan. TRUE

 

Difficulty: Medium 

2. Discovery sampling is equivalent to an attributes sampling plan with a specified expected deviation rate of 0 percent. TRUE

 

Difficulty: Medium 

3. Increases in the number of deviations in an attributes sample results in an increase in the achieved upper deviation rate of the attributes sample. TRUE

 

Difficulty: Medium 

4. The definition of a "deviation" for a test of a control should include only those deviations that result in misstatements in the financial statements. FALSE

 

Difficulty: Hard 

5. Statistical sampling cannot be used to test all control activities. TRUE

 

Difficulty: Medium 

6. Using ratio and difference estimation for a sample is an example of a dual purpose test. FALSE

 

Difficulty: Medium 

7. Increases in the tolerable misstatement result in a decreased sample size when using mean-per-unit estimation. TRUE

 

Difficulty: Medium 

8. The mean book value of the items included in a mean-per-unit sample is not directly used in the evaluation of sample results. TRUE

 

Difficulty: Hard 

9. When evaluating the results of a variables sampling plan, the projected misstatement is calculated and compared to the tolerable misstatement. TRUE

 

Difficulty: Easy 

10. Auditors project the misstatements found in the sample to the population when using statistical sampling, but not when using nonstatistical sampling. FALSE

 

Difficulty: Medium

Chapter 16 Auditing Operations and Completing the Audit Answer Key 

 

True / False Questions 

1. Analytical procedures are often used for verification of income statement accounts. TRUE

 

Difficulty: Easy 

2. The Miscellaneous Revenue account should only be analyzed if it is material in amount. FALSE

 

Difficulty: Medium 

3. Internal control over payroll is enhanced when the personnel department distributes payroll checks. FALSE

 

Difficulty: Easy 

4. The auditors have a responsibility to report on all FASB-required supplementary information. FALSE

 

Difficulty: Medium 

5. Subsequent events that provide additional evidence as to conditions that existed at the balance sheet date may result in adjusting journal entries. TRUE

 

Difficulty: Medium 

6. Dual dating of an audit report extends the auditors' liability for disclosure through the later date for all areas of the financial statements. FALSE

 

Difficulty: Medium 

7. If management fails to list an unasserted claim in the letter of inquiry to a lawyer, the lawyer is not required to inform the auditors of the omission. TRUE

 

Difficulty: Medium 

8. Normally, general risk contingencies need not be disclosed in the financial statements. TRUE

 

Difficulty: Medium 

9. If not adjusted, a situation in which the total likely misstatement in the financial statements exceeds a material amount is likely to lead to an audit report modification. TRUE

 

Difficulty: Easy 

10. Common to future purchase commitments is the fact that they should be recorded as liabilities at discounted values as of year-end. FALSE

 

Difficulty: Medium

Chapter 17 Auditors' Reports Answer Key 

 

True / False Questions 

1. Audit reports should be dated the date on which the financial statements are issued. FALSE

 

Difficulty: Easy 

2. When the auditors are unable to comply with generally accepted auditing standards, they should issue an opinion that is unqualified, but include an additional explanatory paragraph in the report. FALSE

 

Difficulty: Medium 

3. When evaluating the results of audit tests, materiality depends upon both the dollar amount and the nature of the item. TRUE

 

Difficulty: Easy 

4. A public company's financial statements should be prepared following standards of the Public Company Accounting Oversight Board. FALSE

 

Difficulty: Hard 

5. If financial statements fail to disclose a material fact, the auditors may disclose the information in an explanatory paragraph and issue an unqualified opinion on the statements. FALSE

 

Difficulty: Medium 

6. If financial statements contain a material departure from generally accepted accounting principles, the auditors usually should not issue an unqualified opinion. TRUE

 

Difficulty: Easy 

7. A "very material" change from one generally accepted accounting principle to another generally accepted accounting principle usually results in an adverse opinion by the auditors. FALSE

 

Difficulty: Medium 

8. When there is a significant question about a company's ability to remain a going concern, the report issued is usually unqualified with an explanatory paragraph. TRUE

 

Difficulty: Medium 

9. A client imposed scope limitation will generally result in a disclaimer of opinion. TRUE

 

Difficulty: Medium 

10. Regulation S-X governs the form and content of financial statements filed with the SEC. TRUE

 

Difficulty: Easy

Chapter 19 Additional Assurance Services: Historical Financial Information Answer Key 

 

True / False Questions 

1. An audit opinion on cash basis financial statements is an example of a special report. TRUE

 

Difficulty: Easy 

2. The balance sheet for an individual may be titled a Statement of Financial Condition. TRUE

 

Difficulty: Medium 

3. The auditors should take exception to assets presented at their estimate current values in personal financial statements. FALSE

 

Difficulty: Medium 

4. Personal financial statements may be compiled or reviewed, but they should not be audited. FALSE

 

Difficulty: Easy 

5. A compilation of financial statement provides limited assurance regarding the financial statements. FALSE

 

Difficulty: Medium 

6. Compiled financial statements may omit note disclosures. TRUE

 

Difficulty: Medium 

7. The auditors must issue a compilation report if they prepare a client's financial statements and submit them to a client who intends to use them for external purposes. TRUE

 

Difficulty: Hard 

8. In a compilation report on a prescribed form, the accountants should take exception to all departures from generally accepted accounting principles. FALSE

 

Difficulty: Medium 

9. Letters to underwriters should not contain negative assurances. FALSE

 

Difficulty: Medium 

10. When a U.S.-based organization prepares financial statements which are for use in another country, a U.S. report, modified to reflect the accounting principles of the other country, may be issued. TRUE

Chapter 20 Additional Assurance Services: Other Information Answer Key 

 

True / False Questions 

1. Assurance services improve the quality of information or its context for decision makers. TRUE

 

Difficulty: Easy 

2. Attestation services are similar, but go beyond assurance services in scope of procedures and reporting. FALSE

 

Difficulty: Medium 

3. Independence is required for the performance of all assurance services. TRUE

 

Difficulty: Medium 

4. Practitioners may report on either an assertion about the subject matter, or on the subject matter for most attestation engagements. TRUE

 

Difficulty: Medium 

5. Attestation risk, like audit risk consists of three components--inherent risk, control risk, and substantiation risk. FALSE

 

Difficulty: Medium 

6. The attestation standards prohibit the examination of prospective financial statements. FALSE

 

Difficulty: Medium 

7. A practitioner may be engaged to perform a review of management's discussion and analysis for an annual or an interim period. TRUE

 

Difficulty: Medium 

8. A WebTrust seal assures consumers that they will be satisfied with their purchases. FALSE

 

Difficulty: Easy 

9. Trust Services are a part of the AICPA's vision that increased trust in annual historical financial statements is necessary. FALSE

 

Difficulty: Medium 

10. SysTrust engagements relate only to database systems. FALSE

 

Difficulty: Medium

Chapter 10 Cash and Financial Investments Answer Key 

 

True / False Questions 

1. The auditors should count small petty cash funds at year-end to make sure that balance is not understated on the financial statements. FALSE

 

Difficulty: Easy 

2. Control over the receipt of cash sales is best achieved when two or more employees participate in each transaction. TRUE

 

Difficulty: Easy 

3. Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily. FALSE

 

Difficulty: Medium 

4. Signed checks should be returned to the cash disbursements clerk for mailing. FALSE

 

Difficulty: Medium 

5. Lapping of accounts receivable by an employee is not possible when there is adequate segregation of duties with respect to cash disbursements. FALSE

 

Difficulty: Medium 

6. Confirmations for cash balances should be mailed only to the financial institutions with which the client has a cash balance at year-end. FALSE

 

Difficulty: Hard 

7. A proof of cash is an audit procedure that is performed on almost every engagement. FALSE

 

Difficulty: Medium 

8. A compensating balance agreement generally requires that cash be reclassified as a noncurrent asset. FALSE

 

Difficulty: Medium 

9. Verification of cash and other liquid assets be verified on the same date may prevent substitution of one form of asset for another. TRUE

 

Difficulty: Easy 

10. For investments in securities accounted for by the equity method, the auditors are primarily concerned with verifying the market value of the investments. FALSE

 

Difficulty: Medium 

Chapter 11 Accounts Receivable, Notes Receivable, and Revenue Answer Key   

True / False Questions 

1. The department approving a sales transaction should be the shipping department. FALSE

 

Difficulty: Easy 

2. Accounts receivable that are written-off should not be turned over to a collection agency. FALSE

 

Difficulty: Easy 

3. An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. TRUE

 

Difficulty: Easy 

4. Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. TRUE

 

Difficulty: Easy 

5. Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. FALSE

 

Difficulty: Medium 

6. CPAs use negative accounts receivable confirmations more frequently than positive accounts receivable confirmations. FALSE

 

Difficulty: Medium 

7. Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on. TRUE

 

Difficulty: Medium 

8. Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. TRUE

 

Difficulty: Medium 

9. When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures. TRUE

 

Difficulty: Medium 

10. Material accounts receivable from related parties should be stated separately from other receivables. TRUE

 

Difficulty: Easy

Chapter 12 Inventories and Cost of Goods Sold Answer Key 

 

True / False Questions 

1. Observation of inventories is a generally accepted auditing standard. FALSE

 

Difficulty: Easy 

2. The receiving department should accept only goods for which there is an approved purchase order on hand. TRUE

 

Difficulty: Medium 

3. For good internal control over purchase transactions, purchases should be made from approved vendors by the department needing the goods. FALSE

 

Difficulty: Medium 

4. Auditors should not review the client's planning of the physical inventory. FALSE

 

Difficulty: Medium 

5. The proper cutoff of inventories is best achieved when the client uses prenumbered purchase orders. FALSE

 

Difficulty: Medium 

6. The lower of cost or market test by the auditors is generally designed to assure that inventories are not valued above their net realizable values. TRUE

 

Difficulty: Easy 

7. When the auditors cannot satisfy themselves as to the accuracy of ending inventory and a material misstatement may exist, they normally may still give an unqualified opinion on the client's income statement. FALSE

 

Difficulty: Medium 

8. To test the client's cutoff of inventories, the auditors will make a record of the serial number of the final receiving and shipping documents used prior to the taking of the physical inventory. TRUE

 

Difficulty: Medium 

9. The use of a tagging system for inventory taking is designed to prevent double counting of goods. TRUE

 

Difficulty: Easy 

10. The examination of warehouse receipts is not sufficient verification of a material amount of goods stored in public warehouses. TRUE

 

Difficulty: Medium 

Chapter 13 Property, Plant, and Equipment: Depreciation and Depletion Answer Key 

 

True / False Questions 

1. The auditors' approach to the audit of property, plant and equipment largely results from the fact that relatively few transactions occur. TRUE

 

Difficulty: Easy 

2. A major control procedure related to plant and equipment is a budget for depreciation. FALSE

 

Difficulty: Medium 

3. Evidence of continued ownership of property is obtained by vouching payments to a mortgage trustee. TRUE

 

Difficulty: Medium 

4. The auditors typically observe all major items of property, plant and equipment every year. FALSE

 

Difficulty: Medium 

5. Material purchases of assets from an affiliated company should be disclosed in the financial statements. TRUE

 

Difficulty: Easy 

6. Idle equipment will generally need to be reclassified as a current asset. FALSE

 

Difficulty: Easy 

7. The primary purpose of internal control over plant and equipment is to safeguard the assets from theft. FALSE

 

Difficulty: Medium 

8. A typical procedure in the audit of property is examination of public records to verify the ownership of the property. FALSE

 

Difficulty: Hard 

9. Even when internal control is weak, a significant portion of the audit work on property, plant and equipment may be performed at an interim date. TRUE

 

Difficulty: Hard 

10. In the audit of depletion the auditors must often rely on the work of specialists. TRUE

 

Difficulty: Medium

Chapter 14 Accounts Payable and Other Liabilities Answer Key 

 

True / False Questions 

1. Overstatement of financial results can involve failure to record a transaction. TRUE

 

Difficulty: Medium 

2. Confirmation of accounts payable is a required generally accepted auditing procedure. FALSE

 

Difficulty: Medium 

3. The primary objective of the auditors' examination of accounts payable is to determine whether payments are made on a timely basis. FALSE

 

Difficulty: Easy 

4. Auditors generally consider the evidence regarding accounts payable in the client's possession as more reliable than that for accounts receivable. TRUE

 

Difficulty: Medium 

5. Information regarding the proper cutoff of accounts payable is generally obtained in conjunction with the audit of inventories. TRUE

 

Difficulty: Medium 

6. Accounts payable from an officer should be classified separately from other accounts payable. TRUE

 

Difficulty: Easy 

7. It is more important to maintain effective internal control over accounts payable as it is to maintain effective internal control over accounts receivable. FALSE

 

Difficulty: Medium 

8. For effective internal control over accounts payable, the purchasing department should approve invoices for payment. FALSE

 

Difficulty: Medium 

9. Accounts payable generally present the auditors with difficult valuation problems. FALSE

 

Difficulty: Easy 

10. The confirmation of existing accounts payable does not prove the completeness of recorded accounts payable. TRUE

 

Difficulty: Medium

Chapter 15 Debt and Equity Capital Answer Key 

 

True / False Questions 

1. The formal documentation creating bond indebtedness is called the indenture. TRUE

 

Difficulty: Easy 

2. Registered bondholders receive periodic interest payments without any action on their part. TRUE

 

Difficulty: Easy 

3. The auditors are required to confirm bond holdings directly with the bondholders. FALSE

 

Difficulty: Easy 

4. The auditors should determine that the issuance of bonds was approved by the company's stockholders. FALSE

 

Difficulty: Medium 

5. Long-term liabilities that are maturing must always be classified as a current liability. FALSE

 

Difficulty: Medium 

6. Corporations maintain either a stock certificate book or a stockholders' ledger. FALSE

 

Difficulty: Easy 

7. Dividends should be authorized by the stockholders of the corporation. FALSE

 

Difficulty: Hard 

8. The auditors generally refer to provisions in the partnership agreement when auditing the allocation of partnership income. TRUE

 

Difficulty: Easy 

9. When an independent registrar and stock transfer agent is used, it is likely that the auditor will confirm the number of shares outstanding with those parties rather than the shareholders. TRUE

 

Difficulty: Medium 

10. For a continuing client, the auditors will often find that audit time required for capital stock is small in relation to the dollars recorded in the accounts. TRUE

 

Difficulty: Medium