Ch. 6...

The appropriateness of audit evidence refers to its relevanceand reliability.True

*The sufficiency of evidence is a measure of evidence quality.False

*When testing for existence, the auditor will vouch recorded transactions.True

Evidence that is obtained directly from the client is usually considered more reliable than evidence obtained from a source independent of the client.False

A procedure that involves only inspection of documentation is usually considered to be of lower quality than a procedure involving reperformance.True

All audit procedures need to be performed at or after the client's balance sheet date.False

Substantive analytical procedures are required on every audit.False

One of the most rigorous approaches to substantive analytical procedures is regression analysis.True

The quantity of audit evidence needed when testing anaccount will be influenced by the risk of material misstatement in that account.True

When testing the operating effectiveness of a control, the frequency with which the control is performed will influence the sample size to be used by the auditor.True

Because management estimates are often subjective, the auditor does not need to test these estimates, but can rely solely on management's work.False

When testing management estimates, the auditor should understand the process that management uses to develop its estimates.True

When relying on the work of a specialist, the auditor should evaluate the professional qualifications of the specialist.True

When the auditor uses the work of a specialist, the auditor's responsibility for the audit opinion is reduced.False

The auditor may be able to use generalized audit software to identify transactions that have been entered into with related parties.True

A primary concern for the auditor for related-party transactions is whether undisclosed related-party relationships and transactions exist.True

The auditor should document significant issues that were identified and how they were resolved.True

*As part of the audit documentation, auditors should maintain copies of all client documents reviewed during the audit.

False

A standardized audit program, without any modifications, should be used for each client.False

An audit program can be used to record the audit workperformed and identify those responsible for performing the work.True

Which of the following statements best describes what ismeant by the term appropriateness of audit evidence?

a. Appropriateness is a measure of the quality of audit evidence.b. Appropriateness refers to the relevance and reliability of audit evidence.c. Appropriateness is a measure of the quantity of audit evidence.d. Both a. and b.D

Which of the following statements is true regarding the relationshipbetween risk and evidence sufficiency for substantive tests?

a. Evidence sufficiency will be affected by inherent risk, but not control risk.b. Evidence sufficiency will be affected by control risk, but not inherent risk.c. Evidence sufficiency will be affected by both inherent and control risks.d. None of the above statements are true.C

*An auditor determines that management integrity is high, the risk of material misstatement is low, and the client's internal controls are effective. Which of the following conclusions can be reached regarding the need to obtain direct evidence regarding the

account balances?

a. Direct evidence can be limited to material account balances, and the extent of testing should be sufficient to corroborate the auditor's assessment of low risk.b. Direct evidence of account balances is not needed.c. Direct evidence can be obtained through analytical procedures.d. Direct evidence should be obtained for all accounts, regardless of the auditor's assessment of control risk.A

Which of the following factors affects the relevance of audit evidence?

a. The purpose of the audit procedure.b. The direction of testing.c. The type of procedure.d. All of the above factors affect the relevance of audit evidence.D

*The auditor wishes to test the completeness assertion. Which of the following statements is true regarding the auditor's work flow?

a. The auditor would take a sample of recorded transactions and obtain supporting documentation for those transactions.b. The auditor would perform a process referred to as tracing.c. The auditor would take a sample of source documents and obtain additional supporting documents for those transactions.d. For a sample of items recorded in the sales journal, the auditor would obtain the related shipping documents and customer orders.B

The auditor wishes to gather evidence to test the assertion that the client's capitalization of leased equipment assets is properly valued. Which of the following sources of evidence will the auditor generally find to be of the highest quality (most reliable and relevant)?

a. Inspection of the leased equipment.b. Inspection of documents, including the lease contract and recalculation of capitalized amount and current amortization.c. Confirmation of the current purchase price for similar equipment with vendors.d. Confirmation of the original cost of the equipment with the lessor.B

*Analytical procedures are best used as a substantive audit procedure in which of the following scenarios?

a. The auditor's primary objective is to reduce audit costs to a minimum.b. Internal control risk is high, and therefore it is not efficient to test controls.c. Preliminary analytical procedures indicate that misstatements are likely to occur in significant account balances.d. Substantive analytical procedures would not be appropriate in any of the above scenarios.D

*Which of the following statements is false regarding substantive analytical procedures?

a. Substantive analytical procedures are not required to be performed on all audit engagements.b. If the results of substantive analytical procedures suggest that an account balance is materially correct, the evidence needed from tests of details can likely be reduced.c. Substantive analytical procedures would be performed after tests of details.d. All of the above statements are true.C

The sufficiency of audit evidence is affected by which of the following factors?

a. The reliability of the audit evidence.b. The relevance of the audit evidence gathered.c. The risk of material misstatement of the assertion

being examined.d. All of the above.D

Which of the following statements is true regarding the sufficiency of evidence needed to test an account?

a. Evidence sufficiency is a measure of evidence quality.b. Evidence sufficiency is affected by the quality of evidence.c. A relationship does not exist between evidence sufficiency and evidence quality.d. For a specific client, evidence sufficiency will be the same across all accounts.B

Which of the following procedures would an auditor typically perform first when assessing the reasonableness of management's estimate of its pension liability?

a. Inspect documentation related to the pension transactions that the client has recorded.b. Develop an understanding of management's process for developing the estimate.c. Identify sensitive management assumptions.d. Review transactions occurring prior to the report release date to assess the reasonableness of management estimates.B

Which of the following is a reason that accounts containing management estimates pose a high level of risk of material misstatement for auditors?

a. Accounting estimates are especially susceptible to management bias.b. Accounting estimates are a means for management to manage or misstate the financial statements.c. Accounting estimates are sensitive to variations in management assumptions.d. All of the above are reasons that accounts containing management estimates pose a high level of risk of material misstatement for auditors.

D

For which of the following audit judgments would an auditor be least likely to use an audit specialist?

a. Existence of cash.b. Valuation of works of art.c. Valuation of oil and gas reserves.d. Interpretation of laws and regulations.A

Which of the following statements is true regarding the auditor's use of the work of a specialist?

a. The specialist, not the auditor, is responsible for evaluating whether the specialist's findings support the assertions in the financial statements.b. Because the individual is considered a specialist, the auditor does not need to evaluate the professional qualifications of the specialist.c. The auditor should obtain an understanding of the methods and assumptions used by the specialist.d. All of the above statements are true.C

Which of the following statements is most accurate regarding the auditor's primary focus on a client's related-party transactions?

a. The auditor wants reasonable assurance that all related-party transactions are accounted for differently than transactions with unrelated parties.b. The auditor will want to confirm the existence of the related parties.c. The auditor wants reasonable assurance that all related-party transactions have been appropriately disclosed.d. The auditor will focus on verifying the valuation of the related-party transactions.C

Which of the following transactions would be least likely to be a related-party transaction?

a. A purchase transaction between an entity and its owners.b. A debt-related transaction between an entity and one of its SPEs.c. An exchange of property between an entity and a joint venture in which the entity has part ownership.d. Writing-off obsolete inventory prior to year end.D

Which of the following statements is true regarding audit documentation?

a. Auditors document only those significant issues that have not been resolved by the audit report date.b. Audit documentation provides the principal support for the audit opinion expressed by the auditor.c. Audit documentation would identify who reviewed the audit work, but not who performed the audit work.d. Documentation must be in paper format.B

Which of the following items would typically not be included in the heading of a workpaper?

a. Client name.b. Client balance sheet date.c. Audit firm name.d. A descriptive explanatory title.C

Which of the following statements describes a purpose of an audit program?

a. An audit program is used to specify the procedures to be performed in obtaining audit evidence.b. An audit program is used to record the completion of each audit step.c. An audit program is useful for monitoring the progress of the audit.d. All of the above statements describe the purpose of an audit program.D

Which of the following items would typically not be included in an audit program?

a. A list of audit procedures to be performed.b. An indication of who performed the procedure.c. A workpaper heading.d. All of the above would typically be included in an audit program.D

Ch. 7...

Material misstatements refer only to intentional misstatements that exist in a transaction or financial statement account balance.False

*Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence needed.True

Detection risk is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material before consideration of related controls.False

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.True

Inherent risks at the financial statement level include factors that could threaten the fundamental financial viability of the organization.True

Inherent risk at the financial statement level is not affected by the competence and integrity of management or their potential incentives to misstate the financial statements.

False

Some level of control risk is always present in an organization because of the inherent limitations of internal control.True

*Each of the following factors would lead the auditor to assess control risk at a higher level: the company lacks personnel or expertise to deal with changes in the industry, there exist significant supply chain risks, the industry is mature and declining, and there exist regulatory requirements that increase legal exposure.False

When conducting trend analysis, it is important that the auditor not develop expectations and establish decision rules in advance; doing so would make it more difficult for the auditor to identify unexpected results for additional investigationFalse

*When performing preliminary analytical procedures and evaluating the results of those procedures, it is important that the auditor discusses the results with management before identifying hypotheses to explain the results; by discussing with management the auditor will be better able to identify alternative explanations.False

A high level of detection risk means that the audit firm is willing to take accept a low risk of not detecting a material misstatement.False

The interpretation of audit risk set at a low level (1%) is that the auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statement are fairly presented when they are materially misstated.True

*The nature of risk response refers to the sufficiency and appropriateness of evidence that is necessary given the client's assessed risks, materiality, and the level of audit risk that is deemed acceptable.False

In terms of the timing of the risk response, the following procedures can be completed only at or after period end: comparing the financial statements to the accounting records, evaluating adjusting journal entries made by management in preparing the financial statements, and conducting procedures to response to risks that management may have engaged in improper transactions at period end.True

Which of the following statements is true regarding the concept of materiality?

a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.b. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it possible that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.c. A fact is material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.d. Both (a) and (c) are correct.e. Both (b) and (c) are correct.D

*Which of the following statements is true concerning the concept of performance materiality?

a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence.

b. If performance materiality is set too low, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements.c. If performance materiality is set too high, the auditor might perform more substantive procedures than necessary.d. Performance materiality is essentially the same posting materiality.e. All of the above are true.A

Which of the following statements represent the appropriate directional relationships between the concepts of inherent risk, control risk, audit risk, and detection risk?

a. As inherent risk goes up, audit risk goes up.b. As inherent risk goes up, audit risk goes down.c. As control risk goes up, detection risk goes up.d. As control risk goes up, inherent risk goes down.B

Which of the following statements is true regarding the concept of detection risk?

a. After assessing inherent and control risk and determining the level of acceptable audit risk, the auditor determines detection risk.b. Detection risk is under the control of the auditor, and the level of audit effort that the auditor expends on the engagement depends on the level of detection risk.c. When the risk of material misstatement is higher, detection risk is lower in order to reduce audit risk to an acceptable level.d. The auditor controls detection risk through the nature, timing, and extent of substantive audit procedures.e. All of the above are true.E

Inherent risk is present in organizations at which of the following levels?

a. At the assertion level.b. At the financial statement level in terms of business risk relating to operations.c. At the financial statement level in terms of financial reporting.d. All of the above.D

*Which of the following characteristics would lead theauditor to assess inherent risk relating to financial reporting at a higher level?

a. The account balance represents an asset that is relatively easily stolen.b. The controls over the account balance are weak.c. The company has a history of exactly meeting analyst estimates.d. The company is in an industry that is mature and declining.C

Which of the following statements is true regarding the concept of control risk?

a. When control risk is high, the auditor is concerned that a misstatement may not be prevented, or that if a misstatement exists in the organization's financial statements that it will not be detected, and therefore corrected by management.b. Some organizations have zero control risk because they have made a significant commitment to the effective design and operation of controls.c. Control risk relates to the susceptibility of an assertion to a misstatement, due to either error or fraud, before consideration of any related controls.d. All of the above are true.A

*Which of the following characteristics would lead the auditor to assess control risk at a higher level?

a. It is difficult for the auditor to determine or gain access to the organization or individuals who own and/or control the entity.b. The organization has inadequate accounting staff,

or the staff lacks requisite expertise.c. There exists a lack of supervision of accounting personnel.d. The organization has inadequate information and communication systems.e. All of the above.E

Which of the following statements is true regarding analyticaltechniques?

a. Ratio analysis takes advantage of economic relationships between two or more accounts.b. Ratio and trend analysis are generally carried out through a comparison of client data with expectations based on industry data, prior-period data, and expectations developed from industry trends, client budgets, and so on.c. Developing expectations is the first step in performing analytical procedures.d. All of the above are true.D

*Which of the following statements is false regarding brainstorming?

a. Brainstorming is a group discussion designed to encourageauditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in an organization.b. Brainstorming predominantly occurs during the early planning phases of the audit.c. To facilitate the generation and evaluation of quality ideas during the brainstorming session, a typical practice during brainstorming is to invite criticism and value judgments about ideas generated.d. Participants are encouraged to provide more ideas rather than fewer, with the intent to generate a variety of possible risk assessment scenarios that can be explored during the conduct of the audit.e. All of the above are true.C

*Assume that the auditor sets audit risk at a low level, equal to 1%. What is the appropriate interpretation of this level of audit risk?

a. The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement.b. The auditor is 99% confident that the audit procedures will detect a material misstatement.c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated.d. The auditor is 99% confident that the audit opinion is correct.C

*Assume for Client X that inherent risk is assessed at 30%, control risk is assessed at 100%, audit risk is 5%, and detection risk is therefore determined to be 17%. Assume for Client Z that inherent risk is assessed at 100%, control risk is assessed at 100%, audit risk is 1%, and detection risk is therefore determined to be 1%. What is true about the amount of audit work that will need to be conducted?

a. Client X will require more audit work than Client Z.b. Client Z will require more audit work than Client X.c. Both clients will require a similar amount of audit work.d. The auditor will most likely resign from the Client Z audit because the inherent risk and control risk are so high.B

When considering responses to risk at the individual assertion level, the auditor should do which of the following?

a. Evaluate the reasons for the assessed risk of material misstatement.b. Estimate the likelihood of material misstatement due to the inherent risks of the client.c. Consider the role of internal controls, and determine whether control risk is relatively high or

low, thereby determining whether the auditor should rely on controls or whether the auditor needs to conduct a more substantive audit.d. Obtain more relevant and reliable audit evidence as the auditor's assessment of the risk of material misstatement increases.e. All of the above.E

Which of the following statements is false regarding the nature, timing, and extent of risk responses?

a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance.b. The timing of risk response refers to when audit procedures are conducted and whether those procedures are conducted at announced or predictable times.c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year end, on an unannounced basis, and includes some element of unpredictability in the timing of procedures.d. The extent of risk response refers to the sufficiency of evidence that is necessary given the client's assessed risks, materiality, and the acceptable level of audit risk.C

Ch. 8...

Sampling can be used for both tests of controls and direct tests of account balances and assertions.True

*Audit procedures such as inquiry, observation, and analytical procedures are the primary audit procedures involving audit sampling.False

Sampling risk is the risk that the auditor's conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure were applied in the same way to theentire population.True

The risk of incorrect acceptance of internal control reliability is the risk that the auditor will conclude that the state of internal controls is not effective when internal controls are actually effective.False

A benefit of nonstatistical sampling as compared to statistical sampling is that the sample size can be significantly smaller, thereby making the audit more efficient.False

*A benefit of statistical sampling as compared to nonstatistical sampling is that less auditor judgment is required because the auditor can leverage the power of probability theory.False

Attributes sampling is a statistical sampling method used to estimate the rate of control procedure failures based on selecting one sample and performing the appropriate audit procedure.True

In attributes sampling, the attribute of interest is an individual dollar amount in the population.False

Factual misstatements are those that are the auditor's best estimate of misstatements in a given population based on sample results.False

The division of a population into two or more subgroups is referred to as stratification.True

One strength of MUS is that it automatically selects a sample in proportion to an item's dollar amount, thus providing automatic stratification of the sample.True

*MUS is most often used in situations in which the auditor expects a significant number of large understatements in recorded balances.False

GAS would be useful for completing the following tasks: footing a file, doing arithmetic calculations, checking for gaps in processing sequences, and printing confirmations.True

GAS would be useful in testing the completeness assertion by helping the auditor select data to perform sales cutoff tests around year end.True

*For which of the following auditing procedures would sampling be most appropriate?

a. Examining documents.b. Inquiring of management.c. Observing controls being completed.d. Conducting analytical procedures.A

Which of the following activities would be most likely to be accomplished using sampling?

a. Sorting a file to identify the largest items.b. Scanning for unusual transactions.c. Selecting items and tracing back to source documents.d. Footing the file.C

Which of the following is a question that the auditor will answer when sampling?

a. Which population and sampling unit should be tested, and what characteristics should be examined?b. How many items should be selected for audit testing?c. Which items should be included in the sample?d. What inferences can be made about the overall population from the sample?e. All of the above.E

Refer to Exhibit 8.3 and determine which of the following terms matches this definition: the risk that the auditor will conclude that the state of internal controls is effective when internal controls are actually not effective.

a. The risk of incorrect acceptance of internal control reliability.b. The risk of incorrect acceptance of book value.c. The risk of incorrect rejection of internal control reliability.d. The risk of incorrect rejection of book value.A

Refer to Exhibit 8.4 and determine which of the following statements is true.

a. In nonstatistical sampling, sample size is determined by auditor judgment.b. In statistical sampling, the sample must be randomly selected to give each unit in the population an equal chance to be included in the sample.c. In nonstatistical sampling, evaluation is based on auditor judgment and projections are based on sample results.d. In statistical sampling, the auditor is required to define acceptable risk in advance.e. All of the above.E

Which of the following statements is false?

a. When properly used, either nonstatistical or statistical sampling can be effective in providing

sufficient appropriate audit evidence.b. Statistical sampling allows the auditor to precisely control the risk of making an incorrect inference about the population from which the sample is taken, whereas nonstatistical sampling does not allow such control.c. Nonstatistical sampling may help avoid second guessing by regulators or jurors should those parties question the quality of the sampling method used.d. Combining statistical sampling with audit judgment generally produces a higher quality audit conclusion than using audit judgment alone.C

*In attributes sampling, which of the following will not affect the determination of sample size?

a. Sampling risk.b. The tolerable rate of deviation.c. The expected population deviation rate.d. The risk of incorrect rejection of book value.D

*Refer to Exhibit 8.6. Assume a 5% risk of overreliance, a tolerable deviation rate of 8%, a sample size of 100, and that the number of deviations is 5. What is the upper limit of the possible deviation rate, and what does it mean?

a. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 10.3%.b. 10.3%. The auditor is 95% confident that the real error rate in the population is no greater than 5%.c. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 10.3%.d. 5%. The auditor is 92% confident that the real error rate in the population is no greater than 5%.A

Which of the following definitions is correct?

a. Factual misstatement—A misstatement that has been specifically identified and about which there is no doubt.b. Projected misstatement—The auditor's best

estimate of the misstatement in a given population based on the sample results.c. Tolerable misstatement—A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population.d. Expected misstatement—The level of misstatement that the auditor expects to detect.e. All of the above are correct.E

Which of the following statements is false?

a. Top-stratum items are population items whose book values exceed the sampling interval and are therefore all included in the sample.b. Because the auditor knows the amount of errors in the top-stratum (all items were evaluated), no estimate of errors is required.c. Stratification of the population into several homogeneous sub-populations generally reduces audit efficiency.d. The audit sampling evaluation reflects the sum of top-stratum items and the projected misstatement derived from lower-stratum items.e. None of the above.C

Refer to Exhibit 8.7. Assume that the risk of incorrectacceptance is 10%, tolerable misstatement is 5% of population dollars, and expected misstatement is 30% of tolerable misstatement (in other words, 1.5% of the population dollars). What is the minimum sample size that the auditor should use?

a. 28b. 87c. 120d. 162B

Which of the following represents the correct calculation of the sampling interval?

a. Tolerable error ÷ Risk of incorrect acceptance.b. Sample size ÷ Population size.c. Tolerable error × Risk of incorrect acceptance.d. Population size ÷ Sample size.D

Which of the following is a task commonly performed using GAS?

a. Selecting transactions based on logical identifiers.b. Selecting samples.c. Evaluating samples.d. Printing confirmations.e. All of the above.E

*Which of the following auditing procedures would be conducted using GAS to assess the validity of the valuation assertion?

a. Foot a file.b. Compare sales invoices with shipping documents and/or sales contracts.c. Select a sample of shipping documents and electronically compare them with invoices to determine if billed in the proper period.d. Select contracts for audit review.A