Test # 2 Homework questions

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1. 
?Which of the following types of documentary evidence should the auditor consider to be the most reliable?
1. A sales invoice issued by the client and supported by a delivery receipt from outside trucker?

2. Confirmation of an account payable balance mailed by and returned directly to the auditor. (Au 326.19)

3. A check, issued by the company and bearing the payee's endorsement, that is included with the bank statements mailed directly to the auditor.

4. An audit schedule prepared by the client's controller and reviewed by the client's treasurer.
 
A: Confirmation of an account payable balance mailed by and returned directly to the auditor (Au 3326.19)
 
2. 
?The most reliable type of audit evidence that an auditor can obtain is?
1. Physical examination by the auditor.

2. Calculations by the auditor from company records

3. Confirmation received directly from 3rd parties

4. External documents
 
A: Physical examination by the auditor (Au 326.19) [generally speaking, evidence obtained directly by the auditor through physical examination...would be the most reliable..]
 
3. 
?Audit evidence can come in different forms with different degrees of persuasiveness, which of the following is the least persuasive type of evidence?
1. Vendor's invoice

2. Bank statement obtained from the client

3. Computations made by the auditor

4. Pre-numbered sales invoices
 
A: Pre-numbered sales invoices (Au 326.19)
 
4. 
?Which of the following presumptions is correct about the reliability of audit evidence?
1. Information obtained indirectly from outside sources is the most reliable audit evidence

2. To be reliable, audit evidence should be convincing rather than merely persuasive.

3. Reliability of audit evidence refers to the amount of corroborative evidence obtained

4. Effective internal control provides more assurance about the reliability of audit evidence
 
A:
 
5. 
?Which of the following is NOT a primary purpose of audit documentation?
1. To coordinate the audit

2. To assist in preparation of the audit report

3. To support the financial statements

4. To provide evidence of the audit work performed
 
A: To support the Financial statements
 
6. 
?During an audit engagement, pertinent data are compiled and included in the audit files. The audit files primarily are considered to be?
1. A client-owned record of conclusions reached by the auditors who performed the engagement

2. Evidence supporting financial statements

3. Support for the auditor's representations as to compliance will auditing standards

4. A record to be used as a basis for the following year's engagement
 
A: Support for the auditor's representations as to compliance will auditing standards
 
7. 
?Although the quantity, type, and content of audit documentation will vary with the circumstances, audit documentation generally will include the?
1. Copies of those client examined by the auditor during the course of the engagement

2. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible for the audit

3. Auditor's comments concerning the efficiency and competence of client management personnel

4. Auditing procedures followed and the testing performed in obtaining evidential matter
 
A: Auditing procedures followed and the testing performed in obtaining evidential matter
 
8. 
?The permanent file of an auditor's working papers most likely would include copies of the?
1. Lead schedule

2. Attorney's letters

3. Bank statements

4. Debt agreements
 
A:
 
9. 
Audit Evidence:
?Review the accounts receivable with the credit manager to evaluate their collectability?
 
A: Inquiry
 
10. 
Audit Evidence:
?Stand by the payroll time clock to determine whether any employee "punches in" more than one time?
 
A: Observation
 
11. 
Audit Evidence:
?Count inventory items and record the amount in the audit files?
 
A: Inspection of intangible assets (physical examination)
 
12. 
Audit Evidence:
?Obtain a letter from the client's attorney addressed to the CPA firm stating that the attorney is not aware of any existing lawsuits?
 
A: Confirmation

 
13. 
Audit Evidence:
?Extend the cost of inventory times the quantity on an inventory listing to test whether it is accurate?
 
A: Recalculation
 
14. 
Audit Evidence:
?Obtain a letter from an insurance company to the CPA firm standing the amount of the fire insurance coverage on buildings and equipment?
 
A: Confirmation
 
15. 
Audit Evidence:
?Examine an insurance policy stating the amount of the fire insurance coverage on buildings and equipment?
 
A: Inspection of records or documents (Documents)
 
16. 
Audit Evidence:
?Calculate the ratio of cost of goods sold to sales a a test of overall reasonableness of gross margin relative to the proceeding year?
 
A: Analytical procedures
 
17. 
Audit Evidence:
?Obtain information about internal control by requesting the client to fill out a questionnaire?
 
A: Inquiry
 
18. 
Audit Evidence:
?Trace the total cash disbursements journal to the general ledger?
 
A: Reperformance
 
19. 
Audit Evidence:
?Watch employees count inventory to determine whether company procedures are being followed?
 
A: Observation
 
20. 
Audit Evidence:
?Examine a piece of equipment to make sure that a major acquisition was actually received and is in operation?
 
A: Inspection of tangible assets (physical examination)
 
21. 
Audit Evidence:
?Calculate the ratio of sales commission expense to sales as a test of sales commission?
 
A: Analytical procedures
 
22. 
Audit Evidence:
?Examine corporate minutes to determine the authorization of the issue of bonds?
 
A: Inspection of records or documents (Documents) [this is not inspection of tangible assets as the minutes are not an "asset" in the sense of having intrinsic value. That is, the minutes would not be of value to anyone, other than perhaps a competitor.]
 
23. 
Audit Evidence:
?Obtain a letter from management stating that there are no unrecorded liabilities?
 
A: Inquiry [not confirmation because rep letter is not from an outside party. In some cases the auditor should obtain replies to inquiries in the form of the management representations letter, as is happening here (SAS 106.33)
 
24. 
Audit Evidence:
?Review the total of repairs and maintenance for each month to determine whether any month's total was unusually large?
 
A: Analytical procedures
 
25. 
Audit Evidence:
?Compare a duplicate sales invoice with the sales journal for customer name and amount?
 
A: Inspection of records or documents (documents)
 
26. 
Audit Evidence:
?Add the sales journal entries to determine whether they were correctly totaled?
 
A: Recalculation
 
27. 
Audit Evidence:
?Make a petty cash count to make sure that the amount of the petty fund is intact?
 
A: Inspection of tangible assets (physical examination)
 
28. 
Audit Evidence:
?Obtain a written statement from a bank stating that the client has $15,671 on deposit and liabilities of $500,000 on a demand note?
 
A: Confirmation
 
29. 
ch. 8
?Which of the following is an effective audit planning procedure that helps prevent misunderstanding and inefficient use of audit personnel?
1. Arrange to make copies, for inclusion in the audit files, of those client supporting documents examined by the auditor

2. Arrange to provide the client with copies of the audit programs to be used during the audit

3. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information

4. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing
 
A: Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information
 
30. 
ch. 8
?When auditing related party transaction, an auditor places primary emphasis on?
1. Confirming the existence of the related parties

2. Verifying the valuation of related party transactions

3. Evaluating the disclosure of the related party transactions

4. Ascertaining the rights and obligations of the related parties
 
A: Evaluating the disclosure of the related party transactions
 
31. 
ch. 8
?Which of the following will most likely indicate the existence of related parties?
1. writing down obsolete inventory prior to year end

2. Failing to correct weaknesses in the client's internal control structure

3. An unexplained increase in gross margin

4. Borrowing money at a rate significantly below the market rate
 
A: Borrowing money at a rate significantly below the market rate
 
32. 
ch. 8
?When using the work of a specialist, the auditor may identify and refer to the specialist in the auditor's report if the?
1. Auditor expresses a qualified opinion as a result of the specialist's findings

2. Specialist is not independent of the client

3. Auditor wishes to indicate a division of responsibility

4. Specialist's work provides the auditor greater assurance of reliability
 
A: Auditor expresses a qualified opinion as a result of the specialist's findings
 
33. 
ch. 8
?In assessing whether to accept a client for an audit engagement, a CPA should consider (answer yes or no for each) Client business risk/ Acceptable audit risk?
 
A: yes to both; yes they should consider client business risk and yes they should consider acceptable audit risk
 
34. 
ch. 8
?When approached to perform an audit for the first time, CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether?
1. The predecessor's work should be used

2. The company follows the policy of rotating its auditors

3. In the predecessor's opinion internal control of the company has been satisfactory

4. The engagement should be accepted
 
A: The engagement should be accepted (Au 315.04)
 
35. 
ch. 8
?A successor would most likely make specific inquiries of the predecessor auditor regarding?
1. Specialized accounting principles

2. The competency of the client's internal audit staff

3. The uncertainty inherent in applying sampling procedures

4. Disagreements with management as to auditing procedures
 
A: Disagreements with management as to auditing procedures (Au 315.09)
 
36. 
ch. 8
?Analytical procedures used in planning an audit should focus on identifying?
1. Material weaknesses of internal control

2. The predictability of financial data from individual transactions

3. The various assertions that are embodied in the financial statements

4. Areas that may represent specific risks relevant to the audit
 
A: Areas that may represent specific risks relevant to the audit
 
37. 
ch. 8
?For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent (answer yes or no for each one) In the planning stage/ As substantive test/ In the completion stage?
 
A: Yes (In the planning stage); No (As substantive test); and Yes (In the completion stage)
 
38. 
ch. 8
?Which of the following is least likely to comparable between similar corporations in the same industry line of business?
1. Accounts receivable turnover

2. Earnings per share

3. Gross profit percent

4. Return on assets before interest and taxes
 
A: Earnings per share (Eps would be least likely comparable between similar corporations in an industry. This is because earning [the numerator] can vary based upon management efficiencies, demand, etc. The denominator is affected by issues such as whether a company has many shares outstanding, is "thinly traded" [not many shares outstanding], and the extent to which is capitalized by debt
 
39. 
ch. 8
?Which of the following situations has the best chance of being detected when a CPA compares 2007 revenues and expenses with prior year and investigates all changes exceeding a fixed percent?
1. An increase in property tax rates has not been recognized in the company's 2007 accrual

2. The cashier began lapping accounts receivable in 2007

3. Because of worsening economic conditions, the 2007 provision for uncollectible accounts was inadequate

4. The company changed its capitalization policy for small tools in 2007
 
A: The company changed its capitalization policy for small tools in 2007
 
40. 
ch. 9
?Which of the following statements is correct concerning the concept of materiality?
1. Materiality is determined by reference to guidelines established by the AICPA

2. Materiality depends only on the dollar amount of an item relative to other items in the FS

3. Materiality depends on the nature of an item rather than the dollar amount

4. Materiality is a matter of professional judgment
 
A: Materiality is a matter of professional judgment [never seen a CPA exam question which had as a possible answer "auditor's judgment" and that was not the answer.
 
41. 
ch. 9
?The concept of materiality will be at least important to the CPA in determining the?
1. Scope of the audit of specific accounts

2. Specific transactions that should be reviewed

3. Effects of audit exceptions upon the opinion

4. Effects of the CPA's direct financial interest in a client upon the CPA's independence
 
A: Effects of the CPA's direct financial interest in a client upon the CPA's independence
 
42. 
ch. 9
?In considering materiality for planning purposes, an auditor believes the misstatements aggregating $10,000 will have a material effect on an entity's income statement, but the misstatement will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate?
1. $10,000
2. $15,000
3. $20,000
4. $30,000
 
A:
 
43. 
ch. 9
?Edison Company has few large accounts receivable that total $1,400,000. Victor Company has a great number of small accounts receivable that also total $1,400,000. The importance of a misstatement in any one account is therefore greater for Edison than for Victor. This is an example of?
1. Materiality

2. Comparative analysis

3. Reasonable assistance

4. Relative Assurance
 
A: Materiality
 
44. 
ch. 9
?Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?
1. Auditor's judgment

2. Materiality

3. Inherent risk

4. Reasonable assurance
 
A: Auditor's judgment
 
45. 
ch. 9
?Which of the following best describes the element of inherent risk that underlines the application of GAAS, specifically the standards of field work and reporting?
1. Cash audit work may have to be carried out in a more conclusive manner than inventory audit work

2. Intercompany transactions are usually subject to less detailed scrutiny than arm's length transaction with outside parties

3. Inventories may require more attention by the auditor or an engagement for a merchandising enterprise than on an engagement for a public utility

4.The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts
 
A:
 
46. 
ch. 9
?Which of the following statements is not correct about materiality?
1. The concept of materiality recognizes that some matters are important for fair presentation of FS in conformity with GAAP, whereas other matters are not important

2. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the FS

3. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments

4. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the FS
 
A: An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the FS
 
47. 
ch. 9
?Inherent risk and control risk differ from planned detection risk in that they?
1. Arise from the misapplication of auditing process

2. May be assessed in either quantitative or non-quantitative terms

3. Exist independently of the FS auditor's discretion

4. Can be changed at the auditor's discretion
 
A: Exist independently of the FS audit