Auditing Chapter 7

51 Questions  I  By Kosdaisy
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Quiz based on Auditing and Assurance Services 14e by Arens

  
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  • 1. 
    Which of the following forms of evidence is most reliable?
    • A. 

      General ledger account balances.

    • B. 

      Confirmation of accounts receivable balance received from a customer.

    • C. 

      Internal memo explaining the issuance of a credit memo.

    • D. 

      Copy of month-end adjusting entries.


  • 2. 
    Which of the following is not a characteristic of the reliability of evidence?
    • A. 

      Effectiveness of client internal controls.

    • B. 

      Education of auditor.

    • C. 

      Independence of information provider.

    • D. 

      Timeliness.


  • 3. 
    Which of the following is not a characteristic of the reliability of evidence?
    • A. 

      Qualification of individual providing information.

    • B. 

      Auditor’s direct knowledge.

    • C. 

      Degree of subjectivity.

    • D. 

      Degree of objectivity.


  • 4. 
    Audit evidence obtained directly by the auditor will not be reliable if:
    • A. 

      The auditor lacks the qualifications to evaluate the evidence.

    • B. 

      It is provided by the client’s attorney.

    • C. 

      The client denies its veracity.

    • D. 

      The client denies its veracity.


  • 5. 
    Appropriateness of evidence is a measure of the:
    • A. 

      Quantity of evidence.

    • B. 

      Quality of evidence.

    • C. 

      Sufficiency of evidence.

    • D. 

      Meaning of evidence.


  • 6. 
    Calculating the gross margin as a percent of sales and comparing it with previous periods is what type of evidence?
    • A. 

      Physical examination.

    • B. 

      Analytical procedures.

    • C. 

      Observation.

    • D. 

      Inquiry


  • 7. 
    Auditors must make decisions regarding what evidence to gather and how much to accumulate. Which of the following is a decision that must be made by auditors related to evidence? Sample size   Timing of audit procedures
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes


  • 8. 
    Which of the following statements regarding the relevance of evidence is correct?
    • A. 

      To be relevant, evidence must pertain to the audit objective of the evidence.

    • B. 

      To be relevant, evidence must be persuasive.

    • C. 

      To be relevant, evidence must relate to multiple audit objectives.

    • D. 

      To be relevant, evidence must be derived from a system including effective internal controls.


  • 9. 
    Two determinants of the persuasiveness of evidence are:
    • A. 

      Competence and sufficiency.

    • B. 

      Relevance and reliability.

    • C. 

      Appropriateness and sufficiency.

    • D. 

      Independence and effectiveness.


  • 10. 
    Three common types of confirmations used by auditors are (1) negative confirmations, (2) blank form positive confirmations, and (3) positive confirmations with information included. Place the confirmations in order of reliability from highest to lowest.
    • A. 

      1, 2, 3.

    • B. 

      3, 2, 1.

    • C. 

      2, 3, 1.

    • D. 

      3, 1, 2.


  • 11. 
    When auditors use documents to support recorded transactions, the process is often called:
    • A. 

      Inquiry

    • B. 

      Confirmation

    • C. 

      Vouching

    • D. 

      Physical examination.


  • 12. 
    An example of an external document is:
    • A. 

      Employees’ time reports.

    • B. 

      Bank statements.

    • C. 

      Purchase order for company purchases.

    • D. 

      Carbon copies of checks.


  • 13. 
    An example of a document the auditor receives from the client, but which was prepared by someone outside the client’s organization, is a(n):
    • A. 

      Confirmation

    • B. 

      Sales invoice.

    • C. 

      Vendor invoice.

    • D. 

      Bank reconciliation.


  • 14. 
    “Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor” is a definition of:
    • A. 

      Analytical procedures.

    • B. 

      Tests of transactions.

    • C. 

      Tests of balances.

    • D. 

      Auditing


  • 15. 
    Often, auditor procedures result in significant differences being discovered by the auditor. The auditor should investigate further if:  Significant differences are not expected but do exist   Significant differences are expected but do not exist
    • A. 

      Yes No No Yes Yes No No Yes Yes No No Yes Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes


  • 16. 
    Which of the following is not a purpose of analytical procedures?
    • A. 

      Understand the client’s industry.

    • B. 

      Assess the client’s ability to continue as a going concern.

    • C. 

      Evaluate internal controls.

    • D. 

      Reduce detailed audit tests.


  • 17. 
    Which of the following statements is not true?   “The evidence-gathering technique of inquiry:
    • A. 

      Cannot be regarded as conclusive.”

    • B. 

      Requires the gathering of corroborative evidence.”

    • C. 

      Is the auditor’s principal method of evaluating the client’s internal control.”

    • D. 

      Does not provide evidence from an independent source.”


  • 18. 
    Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion?
    • A. 

      Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion?

    • B. 

      Correspondence with a stockbroker regarding the quantity of client’s investments held in street name by the broker.

    • C. 

      Minutes of the board of directors authorizing the purchase of stock as an investment.

    • D. 

      The auditor’s count of marketable securities.


  • 19. 
    Analytical procedures must be used during which phase(s) of the audit? Test of Controls   Planning    Completion
    • A. 

      Yes Yes Yes

    • B. 

      No Yes Yes

    • C. 

      Yes No No

    • D. 

      No No No


  • 20. 
    Which of the following statements is not correct?
    • A. 

      It is possible to vary the sample size from one unit to 100% of the items in the population.

    • B. 

      It is possible to vary the sample size from one unit to 100% of the items in the population.

    • C. 

      The decision of how many items to test must be made by the auditor for each audit procedure.

    • D. 

      The sample size for any given procedure is likely to vary from audit to audit.


  • 21. 
    Auditors will replace tests of details with analytical procedures when possible because the:
    • A. 

      Analytical procedures are more reliable.

    • B. 

      Tests of details are more expensive.

    • C. 

      Analytical procedures are more persuasive.

    • D. 

      Tests of details are more difficult to interpret.


  • 22. 
    Which of the following statements is not correct?
    • A. 

      Persuasiveness of evidence is partially determined by the reliability of evidence.

    • B. 

      The quantity of evidence obtained determines its sufficiency.

    • C. 

      The auditor need not consider the independence of an information source when obtaining evidence.

    • D. 

      Evidence obtained directly by the auditor is ordinarily more reliable than evidence obtained from other sources.


  • 23. 
    Which of the following is the most objective type of evidence?
    • A. 

      A letter written by the client’s attorney discussing the likely outcome of outstanding lawsuits.

    • B. 

      The physical count of securities and cash.

    • C. 

      Inquiries of the credit manager about the collectability of noncurrent accounts receivable.

    • D. 

      Observation of cobwebs on some inventory bins.


  • 24. 
    Which of the following statements regarding documentation is not correct?
    • A. 

      Documentation includes examining client records such as general ledgers and supporting journals.

    • B. 

      Internal documents are documents that are generated within the company and used to communicate with external parties

    • C. 

      External documents are documents that are generated outside of the company and are used to communicate the results of a transaction.

    • D. 

      External documents are considered more reliable than internal documents.


  • 25. 
    When making decisions about evidence for a given audit, the auditor’s goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so:
    • A. 

      No matter the cost involved in obtaining such evidence.

    • B. 

      At any cost because the costs are billed to the client.

    • C. 

      At the lowest possible total cost.

    • D. 

      At the cost suggested in the engagement letter.


  • 26. 
    “Physical examination” is the inspection or count by the auditor of items such as:
    • A. 

      Cash, inventory, and payroll timecards.

    • B. 

      Cash, inventory, canceled checks, and sales documents.

    • C. 

      Cash, inventory, canceled checks, and tangible fixed assets.

    • D. 

      Cash, inventory, securities, notes receivable, and tangible fixed assets.


  • 27. 
    Which items affect the sufficiency of evidence when choosing a sample? Selecting items with a high likelihood of misstatement   The randomness of the items selected
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes


  • 28. 
    Which of the following is an example of vouching?
    • A. 

      Trace inventory purchases from the acquisitions journal to supporting invoices.

    • B. 

      Trace selected sales invoices to the sales journal.

    • C. 

      Trace details of employee paychecks to the payroll journal.

    • D. 

      All of the above are examples of vouching.


  • 29. 
    Which of the following statements about confirmations is true?
    • A. 

      Confirmations are expensive and so are often not used.

    • B. 

      Confirmations may inconvenience those asked to supply them, but they are widely used.

    • C. 

      Confirmations are sometimes not reliable and so auditors use them only as necessary.

    • D. 

      Confirmations are required for several balance sheet accounts but no income statement accounts.


  • 30. 
    Traditionally, confirmations are used to verify:
    • A. 

      Traditionally, confirmations are used to verify:

    • B. 

      Bank balances and accounts receivable.

    • C. 

      Fixed asset additions.

    • D. 

      Payroll expenses.


  • 31. 
    To be considered reliable evidence, confirmations must be controlled by:
    • A. 

      A client employee responsible for accounts receivable.

    • B. 

      A financial statement auditor.

    • C. 

      A client’s internal audit department.

    • D. 

      A client’s controller or CFO.


  • 32. 
    Indicate whether confirmation of accounts receivable and accounts payable is required or optional: Accounts Receivable   Accounts Payable
    • A. 

      Required Required

    • B. 

      Required Optional

    • C. 

      Optional Required

    • D. 

      Optional Optional


  • 33. 
    The Auditing Standards Board has concluded that analytical procedures are so important that they are required during: 
    • A. 

      Planning and test of control phases.

    • B. 

      Planning and completion phases.

    • C. 

      Test of control and completion phases.

    • D. 

      Planning, test of control, and completion phases.


  • 34. 
    Which of the following statements regarding analytical procedures is not correct?
    • A. 

      Analytical tests emphasize a comparison of client internal controls to GAAP.

    • B. 

      Analytical procedures are required on all audits.

    • C. 

      Analytical procedures can be used as substantive tests.

    • D. 

      For certain accounts with small balances, analytical procedures alone may be sufficient evidence.


  • 35. 
    A benefit obtained from comparing the client’s data with industry averages is that it provides a(n):
    • A. 

      Indication of the likelihood of financial problems.

    • B. 

      Indication where errors exist in the statements.

    • C. 

      Benchmark to be used in evaluating a client’s budgets.

    • D. 

      Comparison of “what is” with “what should be.”


  • 36. 
    The primary purpose of performing analytical procedures in the planning phase of an audit is to:
    • A. 

      Help the auditor obtain an understanding of the client’s industry and business.

    • B. 

      Assess the going concern assumption.

    • C. 

      Indicate possible misstatements.

    • D. 

      Reduce detailed tests.


  • 37. 
    Which of the following is not a correct combination of terms and related type of audit evidence?
    • A. 

      Foot – reperformance.

    • B. 

      Compare – documentation.

    • C. 

      Vouch – documentation.

    • D. 

      Trace – analytical procedures.


  • 38. 
    Which of the following is not a correct combination of terms and related type of audit evidence?
    • A. 

      Inquire – inquiries of client.

    • B. 

      Count – physical examination.

    • C. 

      Recompute – documentation.

    • D. 

      Read – documentation.


  • 39. 
    Which of the following is not one of the major types of analytical procedures?
    • A. 

      Compare client with industry averages.

    • B. 

      Compare client with prior year.

    • C. 

      Compare client with budget.

    • D. 

      Compare client with SEC averages.


  • 40. 
    Evidence is generally considered appropriate when:
    • A. 

      It has been obtained by random selection.

    • B. 

      There is enough of it to afford a reasonable basis for an opinion on financial statements.

    • C. 

      It has the qualities of being relevant, objective, and free from known bias.

    • D. 

      It consists of written statements made by managers of the enterprise under audit.


  • 41. 
    Given the economic constraints in which auditors collect evidence, the auditor normally gathers evidence that is:
    • A. 

      Irrefutable

    • B. 

      Conclusive

    • C. 

      Persuasive

    • D. 

      Completely convincing.


  • 42. 
    Relevance can be considered only in terms of:
    • A. 

      General audit objectives.

    • B. 

      Specific audit objectives.

    • C. 

      Transaction audit objectives.

    • D. 

      Balance audit objectives.


  • 43. 
    Which of the following statements is not a correct use of the terminology?
    • A. 

      Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.

    • B. 

      Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.

    • C. 

      Documents that originate outside the company are considered more reliable than those that originate within the client’s organization.

    • D. 

      External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.


  • 44. 
    Evidence is usually more persuasive for balance sheet accounts when it is obtained:
    • A. 

      As close to the balance sheet date as possible.

    • B. 

      Only from transactions occurring on the balance sheet date.

    • C. 

      From various times throughout the client’s year.

    • D. 

      From the time period when transactions in that account were most numerous during the fiscal period.


  • 45. 
    Which of the following statements is not true?
    • A. 

      A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested.

    • B. 

      A large sample of evidence that is neither competent nor timely is not persuasive.

    • C. 

      A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness

    • D. 

      The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency.


  • 46. 
    Which of the following statements is not correct?
    • A. 

      Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.

    • B. 

      For certain immaterial accounts, analytical procedures may be the only evidence needed.

    • C. 

      In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.

    • D. 

      Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.


  • 47. 
    Which of the following discoveries through the use of analytical procedures would indicate a relatively high risk of financial failure?
    • A. 

      A decline in gross margin percentages.

    • B. 

      An increase in the balance in fixed assets.

    • C. 

      An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased.

    • D. 

      A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets.


  • 48. 
    Physical examination is usually the least expensive type of audit evidence    Cost of obtaining evidence may be a factor in deciding whether to obtain that evidence
    • A. 

      Yes Yes

    • B. 

      No No

    • C. 

      Yes No

    • D. 

      No Yes


  • 49. 
    A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance. The auditor’s expected account balance may be determined by:
    • A. 

      Using industry standards.

    • B. 

      Using Dun and Bradstreet reports.

    • C. 

      Relating it to some other balance sheet or income statement account or accounts.

    • D. 

      Inquiry of the client.


  • 50. 
    Two analytical procedures available to the auditor are: ·         Compare current year’s balances with the preceding year. ·         Compare details of a particular account’s balance with the preceding year.  Shortcomings of these two procedures are that:
    • A. 

      The first ignores effects of tests of controls and the second fails to consider possible changes in client personnel.

    • B. 

      The first fails to consider growth or decline in business activity and the second ignores relationships of data to other data.

    • C. 

      Both fail to consider growth or decline in business activity and ignore relationships of data.

    • D. 

      It is difficult, time consuming, and, therefore, costly to perform these procedures.


  • 51. 
    Which of the following statements relating to the competence of evidential matter is always true?
    • A. 

      Evidence from outside an enterprise is always 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 reliable evidence.

    • D. 

      Evidence must be both reliable and relevant to be considered appropriate.


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