Auditing Chapter 7

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  • 1/51 Questions

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

    • Physical examination.
    • Analytical procedures.
    • Observation.
    • Inquiry
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About This Quiz

Quiz based on Auditing and Assurance Services 14e by Arens

Auditing Quizzes & Trivia

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  • 2. 

    An example of an external document is:

    • Employees’ time reports.

    • Bank statements.

    • Purchase order for company purchases.

    • Carbon copies of checks.

    Correct Answer
    A. Bank statements.
    Explanation
    Bank statements are considered external documents because they are not generated or created by the company itself. They are official records provided by the bank that show the company's financial transactions, including deposits, withdrawals, and balances. Bank statements are independent and can be used as evidence in financial audits or legal proceedings. Unlike employees' time reports, purchase orders, or carbon copies of checks, which are internally generated by the company, bank statements come from an external source and provide an objective view of the company's financial activities.

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  • 3. 

    Traditionally, confirmations are used to verify:

    • Traditionally, confirmations are used to verify:

    • Bank balances and accounts receivable.

    • Fixed asset additions.

    • Payroll expenses.

    Correct Answer
    A. Bank balances and accounts receivable.
    Explanation
    Confirmations are commonly used to verify bank balances and accounts receivable. Bank balances can be confirmed by contacting the bank directly to ensure the accuracy of the reported balance. Accounts receivable confirmations involve contacting customers to validate the outstanding balances owed to the company. Both confirmations help ensure the accuracy and reliability of financial statements by independently verifying the reported figures.

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  • 4. 

    Audit evidence obtained directly by the auditor will not be reliable if:

    • The auditor lacks the qualifications to evaluate the evidence.

    • It is provided by the client’s attorney.

    • The client denies its veracity.

    • The client denies its veracity.

    Correct Answer
    A. The auditor lacks the qualifications to evaluate the evidence.
    Explanation
    Audit evidence obtained directly by the auditor will not be reliable if the auditor lacks the qualifications to evaluate the evidence. This means that if the auditor does not have the necessary knowledge, skills, or expertise to properly assess and interpret the evidence, it cannot be considered reliable. It is crucial for auditors to possess the required qualifications in order to effectively evaluate the evidence and draw accurate conclusions about the financial statements. Without the appropriate qualifications, the auditor may misinterpret the evidence and compromise the reliability of the audit findings.

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  • 5. 

    Which of the following is not a characteristic of the reliability of evidence?

    • Effectiveness of client internal controls.

    • Education of auditor.

    • Independence of information provider.

    • Timeliness.

    Correct Answer
    A. Education of auditor.
    Explanation
    The education of the auditor is not a characteristic of the reliability of evidence because it pertains to the qualifications and knowledge of the auditor, rather than the reliability of the evidence itself. The reliability of evidence is determined by factors such as the effectiveness of client internal controls, independence of the information provider, and timeliness of the evidence.

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  • 6. 

    “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:

    • Analytical procedures.

    • Tests of transactions.

    • Tests of balances.

    • Auditing

    Correct Answer
    A. Analytical procedures.
    Explanation
    The definition provided describes the process of evaluating financial information by studying the relationships between financial and nonfinancial data and comparing recorded amounts to the auditor's expectations. This aligns with the concept of analytical procedures, which involve analyzing data to identify significant fluctuations or relationships that may indicate potential errors or risks. Therefore, the correct answer is analytical procedures.

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  • 7. 

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

    • Irrefutable

    • Conclusive

    • Persuasive

    • Completely convincing.

    Correct Answer
    A. Persuasive
    Explanation
    Auditors gather evidence that is persuasive because it is not always possible to obtain evidence that is irrefutable, conclusive, or completely convincing. Persuasive evidence is sufficient to support the auditor's opinion and provide reasonable assurance, even though it may not be 100% conclusive. The auditor uses professional judgment to evaluate the persuasiveness of the evidence and determine its reliability and relevance in forming an opinion on the financial statements.

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  • 8. 

    Appropriateness of evidence is a measure of the:

    • Quantity of evidence.

    • Quality of evidence.

    • Sufficiency of evidence.

    • Meaning of evidence.

    Correct Answer
    A. Quality of evidence.
    Explanation
    The appropriateness of evidence refers to the quality of evidence. It is not about the quantity of evidence, but rather the reliability, relevance, and credibility of the evidence presented. The appropriateness of evidence ensures that it is trustworthy, accurate, and supports the claims or arguments being made. It is important to have high-quality evidence to make informed decisions, draw valid conclusions, and support logical reasoning.

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  • 9. 

    When auditors use documents to support recorded transactions, the process is often called:

    • Inquiry

    • Confirmation

    • Vouching

    • Physical examination.

    Correct Answer
    A. Vouching
    Explanation
    Vouching is the process where auditors use documents to support recorded transactions. It involves examining the supporting documents such as invoices, receipts, and bank statements to verify the accuracy and authenticity of the recorded transactions. This helps auditors ensure that the transactions have been properly recorded and are supported by appropriate evidence.

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  • 10. 

    Which of the following is the most objective type of evidence?

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

    • The physical count of securities and cash.

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

    • Observation of cobwebs on some inventory bins.

    Correct Answer
    A. The physical count of securities and cash.
    Explanation
    The physical count of securities and cash is the most objective type of evidence because it involves directly observing and counting the actual assets. This evidence is tangible and verifiable, providing a concrete and accurate representation of the assets' existence and value. In contrast, the other options involve subjective information or interpretations that may be influenced by personal opinions or biases. The letter from the attorney, inquiries of the credit manager, and observation of cobwebs on inventory bins are all subjective forms of evidence that may not provide a reliable or unbiased assessment of the situation.

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  • 11. 

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

    • Inquire – inquiries of client.

    • Count – physical examination.

    • Recompute – documentation.

    • Read – documentation.

    Correct Answer
    A. Recompute – documentation.
    Explanation
    The given answer, "Recompute - documentation," is not a correct combination of terms and related type of audit evidence because recomputing involves verifying the mathematical accuracy of calculations, which is a substantive procedure, not a type of audit evidence. Documentation, on the other hand, refers to the support and evidence obtained from client-provided documents. Therefore, the combination of recompute and documentation does not align with the correct types of audit evidence.

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  • 12. 

    Evidence is generally considered appropriate when:

    • It has been obtained by random selection.

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

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

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

    Correct Answer
    A. It has the qualities of being relevant, objective, and free from known bias.
    Explanation
    Evidence is generally considered appropriate when it has the qualities of being relevant, objective, and free from known bias. This means that the evidence should be directly related to the matter being examined, it should be unbiased and not influenced by personal opinions or interests, and it should be reliable and accurate. By ensuring these qualities, the evidence can be considered trustworthy and can provide a reasonable basis for forming an opinion on financial statements.

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  • 13. 

    Which of the following statements regarding the relevance of evidence is correct?

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

    • To be relevant, evidence must be persuasive.

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

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

    Correct Answer
    A. To be relevant, evidence must pertain to the audit objective of the evidence.
    Explanation
    The correct answer is "To be relevant, evidence must pertain to the audit objective of the evidence." This means that in order for evidence to be considered relevant, it must be directly related to the specific objective of the audit being conducted. The evidence should support or provide information that is necessary to achieve the audit objective and help in forming a conclusion or opinion about the subject matter being audited.

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  • 14. 

    Two determinants of the persuasiveness of evidence are:

    • Competence and sufficiency.

    • Relevance and reliability.

    • Appropriateness and sufficiency.

    • Independence and effectiveness.

    Correct Answer
    A. Appropriateness and sufficiency.
    Explanation
    The persuasiveness of evidence is determined by its appropriateness and sufficiency. Appropriateness refers to whether the evidence is relevant and applicable to the argument or claim being made. It should directly support the point being made and be free from any biases or fallacies. Sufficiency, on the other hand, refers to the quantity and quality of evidence provided. It should be enough to convince the audience and address any potential counterarguments. Therefore, evidence that is both appropriate and sufficient is more likely to be persuasive.

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  • 15. 

    To be considered reliable evidence, confirmations must be controlled by:

    • A client employee responsible for accounts receivable.

    • A financial statement auditor.

    • A client’s internal audit department.

    • A client’s controller or CFO.

    Correct Answer
    A. A financial statement auditor.
    Explanation
    The correct answer is a financial statement auditor. A financial statement auditor is an independent and objective professional who examines and evaluates an organization's financial records and statements. They are responsible for ensuring the accuracy and reliability of financial information. Confirmations, which are requests for verification of financial information from external parties such as customers and banks, are an important part of the auditing process. By having confirmations controlled by a financial statement auditor, it ensures that the evidence obtained is unbiased and reliable.

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  • 16. 

    Which of the following is not one of the major types of analytical procedures?

    • Compare client with industry averages.

    • Compare client with prior year.

    • Compare client with budget.

    • Compare client with SEC averages.

    Correct Answer
    A. Compare client with SEC averages.
    Explanation
    The major types of analytical procedures involve comparing the client's financial information with industry averages, prior year data, and budget figures. These comparisons help identify any significant deviations or trends that may require further investigation. However, comparing the client with SEC averages is not considered one of the major types of analytical procedures. This is because SEC averages are not readily available or commonly used for comparison purposes, unlike industry averages, prior year data, and budget figures.

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  • 17. 

    Which of the following is not a characteristic of the reliability of evidence?

    • Qualification of individual providing information.

    • Auditor’s direct knowledge.

    • Degree of subjectivity.

    • Degree of objectivity.

    Correct Answer
    A. Degree of subjectivity.
    Explanation
    The reliability of evidence is determined by various factors, such as the qualification of the individual providing the information, the auditor's direct knowledge, and the degree of objectivity. However, the degree of subjectivity is not a characteristic of the reliability of evidence. Subjectivity refers to personal opinions or biases, which can undermine the objectivity and reliability of evidence. Therefore, the absence of subjectivity enhances the reliability of evidence.

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  • 18. 

    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:

    • No matter the cost involved in obtaining such evidence.

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

    • At the lowest possible total cost.

    • At the cost suggested in the engagement letter.

    Correct Answer
    A. At the lowest possible total cost.
    Explanation
    The auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified. However, it is important to do so at the lowest possible total cost. This means that the auditor needs to balance the need for obtaining enough evidence with the cost involved in obtaining it. By minimizing the total cost, the auditor can ensure that the audit is conducted efficiently and effectively, while also providing value to the client.

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  • 19. 

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

    • Planning and test of control phases.

    • Planning and completion phases.

    • Test of control and completion phases.

    • Planning, test of control, and completion phases.

    Correct Answer
    A. Planning and completion phases.
    Explanation
    Analytical procedures are a crucial part of the audit process as they involve evaluating financial information through analysis and comparison. These procedures help auditors assess the reasonableness of the financial statements and detect any potential misstatements or irregularities. The planning phase is important because it allows auditors to identify key areas of risk and determine the appropriate scope and nature of the audit procedures. The completion phase is also crucial as it involves finalizing the audit and ensuring that all necessary procedures have been performed. Therefore, analytical procedures are required during both the planning and completion phases of the audit.

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  • 20. 

    Which of the following statements is not a correct use of the terminology?

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

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

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

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

    Correct Answer
    A. Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly.
    Explanation
    The correct answer is "Documentary evidence is more reliable when it is received by the auditor indirectly rather than directly." This statement is not correct because documentary evidence is generally considered more reliable when it is received directly by the auditor, rather than indirectly. Indirect receipt of documentary evidence can introduce potential risks of tampering, manipulation, or misinterpretation of the evidence, making it less reliable compared to direct receipt.

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  • 21. 

    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

    • Yes No No Yes Yes No No Yes Yes No No Yes Yes Yes

    • No No

    • Yes No

    • No Yes

    Correct Answer
    A. Yes No No Yes Yes No No Yes Yes No No Yes Yes Yes
    Explanation
    The auditor should investigate further if significant differences are not expected but do exist. This suggests that there may be errors or irregularities in the financial statements that need to be investigated and resolved.

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  • 22. 

    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):

    • Confirmation

    • Sales invoice.

    • Vendor invoice.

    • Bank reconciliation.

    Correct Answer
    A. Vendor invoice.
    Explanation
    A vendor invoice is a document that the auditor receives from the client but is prepared by someone outside the client's organization. This document is typically sent by a vendor to the client to request payment for goods or services provided. The auditor may review these invoices to ensure that they are accurate and properly recorded in the client's financial statements. Confirmation, sales invoice, and bank reconciliation are not examples of documents prepared by someone outside the client's organization.

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  • 23. 

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

    • Cash, inventory, and payroll timecards.

    • Cash, inventory, canceled checks, and sales documents.

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

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

    Correct Answer
    A. Cash, inventory, securities, notes receivable, and tangible fixed assets.
  • 24. 

    Which of the following statements is not correct?

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

    • The quantity of evidence obtained determines its sufficiency.

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

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

    Correct Answer
    A. The auditor need not consider the independence of an information source when obtaining evidence.
    Explanation
    The correct answer is "The auditor need not consider the independence of an information source when obtaining evidence." This statement is not correct because the independence of an information source is an important factor to consider when obtaining evidence. Independent sources are less likely to have biases or conflicts of interest, making their evidence more reliable. Therefore, the auditor should always consider the independence of an information source to ensure the credibility and objectivity of the evidence obtained.

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  • 25. 

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

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

    • Assess the going concern assumption.

    • Indicate possible misstatements.

    • Reduce detailed tests.

    Correct Answer
    A. Help the auditor obtain an understanding of the client’s industry and business.
    Explanation
    Performing analytical procedures in the planning phase of an audit helps the auditor obtain an understanding of the client's industry and business. Analytical procedures involve evaluating financial information by studying plausible relationships among both financial and non-financial data. By comparing current year data to industry benchmarks, historical data, and client expectations, auditors can identify unusual fluctuations or trends that may indicate potential risks or areas of further investigation. This understanding of the client's industry and business is crucial for the auditor to effectively plan the audit procedures and identify areas of potential risk or misstatements.

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  • 26. 

    Evidence is usually more persuasive for balance sheet accounts when it is obtained:

    • As close to the balance sheet date as possible.

    • Only from transactions occurring on the balance sheet date.

    • From various times throughout the client’s year.

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

    Correct Answer
    A. As close to the balance sheet date as possible.
    Explanation
    Evidence is usually more persuasive for balance sheet accounts when it is obtained as close to the balance sheet date as possible because it provides the most accurate and up-to-date information about the financial position of the company. Obtaining evidence closer to the balance sheet date ensures that any changes or transactions that occurred after that date are captured, allowing for a more accurate representation of the company's financial position. This helps in making informed decisions and assessments about the company's financial health.

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  • 27. 

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

    • Yes Yes Yes

    • No Yes Yes

    • Yes No No

    • No No No

    Correct Answer
    A. No Yes Yes
    Explanation
    Analytical procedures must be used during the planning and completion phases of the audit. During the planning phase, analytical procedures help auditors gain an understanding of the client's business and identify potential risks. These procedures involve comparing financial information to prior periods, industry averages, and budgeted amounts to identify any significant fluctuations or anomalies. During the completion phase, analytical procedures are used to evaluate the overall reasonableness of the financial statements and to assess the accuracy and completeness of the audit work performed. These procedures involve comparing the financial information to expectations and investigating any significant variances.

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  • 28. 

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

    • Required Required

    • Required Optional

    • Optional Required

    • Optional Optional

    Correct Answer
    A. Required Optional
    Explanation
    Confirmation of accounts receivable is required in order to verify the accuracy and existence of the balances owed by customers. This helps to ensure that the company's financial statements reflect the true amount of money that is expected to be received. On the other hand, confirmation of accounts payable is optional as it is not necessary to confirm the balances owed to suppliers and other creditors. However, some companies may choose to confirm accounts payable to ensure the accuracy of their financial records and to maintain good relationships with their suppliers.

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  • 29. 

    Which of the following statements relating to the competence of evidential matter is always true?

    • Evidence from outside an enterprise is always reliable.

    • Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.

    • Oral representations made by management are not reliable evidence.

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

    Correct Answer
    A. Evidence must be both reliable and relevant to be considered appropriate.
    Explanation
    The correct answer is that evidence must be both reliable and relevant to be considered appropriate. This means that in order for evidence to be useful in making decisions or forming judgments, it must be trustworthy and applicable to the specific situation. Reliability ensures that the evidence is accurate, verifiable, and free from bias, while relevance ensures that the evidence is directly related to the matter at hand. By requiring both reliability and relevance, decision-makers can have confidence in the information they are using to support their conclusions.

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  • 30. 

    Auditors will replace tests of details with analytical procedures when possible because the:

    • Analytical procedures are more reliable.

    • Tests of details are more expensive.

    • Analytical procedures are more persuasive.

    • Tests of details are more difficult to interpret.

    Correct Answer
    A. Tests of details are more expensive.
    Explanation
    Auditors will replace tests of details with analytical procedures when possible because tests of details are more expensive. This means that conducting tests of details requires more resources, such as time and money, compared to performing analytical procedures. By using analytical procedures, auditors can save costs and still obtain sufficient evidence to support their audit conclusions. Therefore, the cost-effectiveness of analytical procedures makes them a preferred choice over tests of details.

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  • 31. 

    Which of the following statements regarding analytical procedures is not correct?

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

    • Analytical procedures are required on all audits.

    • Analytical procedures can be used as substantive tests.

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

    Correct Answer
    A. Analytical tests emphasize a comparison of client internal controls to GAAP.
    Explanation
    Analytical procedures are used in the audit process to evaluate financial information by analyzing relationships and trends. They can be used as both substantive tests and tests of controls. However, analytical procedures do not specifically focus on comparing client internal controls to GAAP (Generally Accepted Accounting Principles). Instead, they primarily focus on identifying unusual or unexpected fluctuations or relationships in financial data. Therefore, the statement that "Analytical tests emphasize a comparison of client internal controls to GAAP" is not correct.

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  • 32. 

    Which of the following forms of evidence is most reliable?

    • General ledger account balances.

    • Confirmation of accounts receivable balance received from a customer.

    • Internal memo explaining the issuance of a credit memo.

    • Copy of month-end adjusting entries.

    Correct Answer
    A. General ledger account balances.
    Explanation
    General ledger account balances are the most reliable form of evidence because they provide an accurate and up-to-date record of all financial transactions. These balances are regularly reconciled and verified, ensuring their accuracy. On the other hand, confirmation of accounts receivable balance received from a customer, internal memos, and copies of month-end adjusting entries may be subject to errors, manipulation, or misinterpretation. Therefore, general ledger account balances are the most trustworthy source of evidence for financial transactions.

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  • 33. 

    Which of the following statements regarding documentation is not correct?

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

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

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

    • External documents are considered more reliable than internal documents.

    Correct Answer
    A. Internal documents are documents that are generated within the company and used to communicate with external parties
    Explanation
    Internal documents are documents that are generated within the company and used for internal purposes, such as communicating within the organization. They are not used to communicate with external parties.

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  • 34. 

    Relevance can be considered only in terms of:

    • General audit objectives.

    • Specific audit objectives.

    • Transaction audit objectives.

    • Balance audit objectives.

    Correct Answer
    A. Specific audit objectives.
    Explanation
    The question is asking about the concept of relevance in auditing. Relevance in auditing refers to the degree to which information is related and useful to the specific audit objectives. General audit objectives refer to the overall goals of an audit, while transaction and balance audit objectives are more specific and focused on particular aspects of the audit. Therefore, the most appropriate answer is specific audit objectives, as relevance is primarily considered in relation to these specific objectives.

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  • 35. 

    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.

    • 1, 2, 3.

    • 3, 2, 1.

    • 2, 3, 1.

    • 3, 1, 2.

    Correct Answer
    A. 2, 3, 1.
    Explanation
    The correct answer is 2, 3, 1. This is because positive confirmations with information included are considered the most reliable type of confirmation since they provide specific details and require a response from the recipient. Blank form positive confirmations are less reliable as they do not require the recipient to provide any specific information. Negative confirmations are the least reliable as they only require a response if the recipient disagrees with the information provided. Therefore, the order of reliability from highest to lowest is 2, 3, 1.

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  • 36. 

    Which of the following is not a purpose of analytical procedures?

    • Understand the client’s industry.

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

    • Evaluate internal controls.

    • Reduce detailed audit tests.

    Correct Answer
    A. Evaluate internal controls.
    Explanation
    The purpose of analytical procedures is to understand the client's industry, assess the client's ability to continue as a going concern, and reduce detailed audit tests. Evaluating internal controls, on the other hand, is not a purpose of analytical procedures. Analytical procedures are used to analyze relationships and trends in financial data, while evaluating internal controls involves assessing the effectiveness of a company's internal control system in preventing and detecting errors and fraud.

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  • 37. 

    Which of the following statements about confirmations is true?

    • Confirmations are expensive and so are often not used.

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

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

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

    Correct Answer
    A. Confirmations may inconvenience those asked to supply them, but they are widely used.
    Explanation
    Confirmations are widely used in auditing because they provide independent and external evidence to support the existence and accuracy of certain balances or transactions. Although they may inconvenience the parties being asked to supply them, they are considered an important and reliable audit procedure. The use of confirmations helps to enhance the reliability and credibility of the audit process by obtaining direct confirmation from third parties. Therefore, the statement that confirmations may inconvenience those asked to supply them, but they are widely used, is true.

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  • 38. 

    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:

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

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

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

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

    Correct Answer
    A. The first fails to consider growth or decline in business activity and the second ignores relationships of data to other data.
    Explanation
    The first procedure of comparing current year's balances with the preceding year fails to consider the growth or decline in business activity. This means that changes in the business's operations and financial performance over time are not taken into account, potentially leading to incomplete or inaccurate conclusions about the financial health of the company.

    The second procedure of comparing details of a particular account's balance with the preceding year ignores the relationships of data to other data. This means that the auditor is only focusing on individual account balances without considering how they relate to other accounts or financial information. This can result in a limited understanding of the overall financial picture and potential misinterpretation of the data.

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  • 39. 

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

    • A decline in gross margin percentages.

    • An increase in the balance in fixed assets.

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

    • 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.

    Correct Answer
    A. 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.
    Explanation
    A higher than normal ratio of long-term debt to net worth indicates that the company has a significant amount of debt compared to its total net worth. This suggests that the company may be facing financial difficulties and could struggle to meet its long-term debt obligations. Additionally, a lower than average ratio of profits to total assets indicates that the company is not generating enough profit relative to its total assets. This could imply that the company is not effectively utilizing its assets to generate revenue and may be at risk of financial failure.

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  • 40. 

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

    • Cannot be regarded as conclusive.”

    • Requires the gathering of corroborative evidence.”

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

    • Does not provide evidence from an independent source.”

    Correct Answer
    A. Is the auditor’s principal method of evaluating the client’s internal control.”
    Explanation
    The given statement "is the auditor’s principal method of evaluating the client’s internal control” is not true because the evidence-gathering technique of inquiry is not the auditor's principal method of evaluating the client's internal control. While inquiry is an important technique used by auditors to gather information, it is not the sole or primary method used to evaluate internal control. Auditors also rely on other methods such as observation, inspection, and reperformance to assess the effectiveness of internal control systems.

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  • 41. 

    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

    • Yes Yes

    • No No

    • Yes No

    • No Yes

    Correct Answer
    A. Yes No
    Explanation
    The sufficiency of evidence when choosing a sample is affected by selecting items with a high likelihood of misstatement. This is because if the sample includes items that are more likely to have errors or misstatements, it increases the likelihood of detecting issues in the overall population. On the other hand, the randomness of the items selected does not directly affect the sufficiency of evidence. While randomness is important for ensuring the sample is representative of the population, it does not guarantee that the sample will include items with a high likelihood of misstatement.

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  • 42. 

    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:

    • Using industry standards.

    • Using Dun and Bradstreet reports.

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

    • Inquiry of the client.

    Correct Answer
    A. Relating it to some other balance sheet or income statement account or accounts.
    Explanation
    The auditor's expected account balance is determined by relating it to some other balance sheet or income statement account or accounts. This means that the auditor will analyze the relationship between different accounts and use this analysis to estimate the expected balance. By comparing the expected balance with the actual balance, the auditor can identify any discrepancies or irregularities that may require further investigation. This method allows the auditor to assess the reasonableness and accuracy of the account balance.

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  • 43. 

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

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

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

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

    • The auditor’s count of marketable securities.

    Correct Answer
    A. Which of the following forms of evidence would be least persuasive in forming the auditor’s opinion?
    Explanation
    The auditor's count of marketable securities would be the least persuasive form of evidence in forming the auditor's opinion. This is because the auditor's count alone may not provide sufficient information about the ownership, valuation, and existence of the securities. Other forms of evidence, such as correspondence with a stockbroker or minutes of the board of directors, would provide additional information and support for the auditor's opinion.

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  • 44. 

    Which of the following statements is not correct?

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

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

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

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

    Correct Answer
    A. It is possible to vary the sample size from one unit to 100% of the items in the population.
    Explanation
    The correct answer is "It is possible to vary the sample size from one unit to 100% of the items in the population." This statement is incorrect because the sample size cannot be varied from one unit to 100% of the items in the population. The sample size is determined based on statistical sampling techniques and considerations such as the desired level of confidence and the acceptable level of risk. It is not possible to have a sample size that covers the entire population as that would be a census rather than a sample.

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  • 45. 

    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

    • Yes Yes

    • No No

    • Yes No

    • No Yes

    Correct Answer
    A. No Yes
    Explanation
    Physical examination is usually the least expensive type of audit evidence because it involves directly observing and inspecting physical assets or documents. This method typically does not require additional costs such as hiring external experts or conducting extensive data analysis. However, the cost of obtaining evidence may still be a factor in deciding whether to obtain that evidence. Other types of audit evidence, such as confirmation from third parties or analytical procedures, may incur additional expenses but could provide more reliable and comprehensive information. Therefore, while physical examination may be less expensive, the cost should still be considered in the overall decision-making process.

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  • 46. 

    Which of the following is an example of vouching?

    • Trace inventory purchases from the acquisitions journal to supporting invoices.

    • Trace selected sales invoices to the sales journal.

    • Trace details of employee paychecks to the payroll journal.

    • All of the above are examples of vouching.

    Correct Answer
    A. Trace inventory purchases from the acquisitions journal to supporting invoices.
    Explanation
    Vouching is the process of verifying the accuracy and authenticity of transactions by examining supporting documents. In this case, tracing inventory purchases from the acquisitions journal to supporting invoices is an example of vouching because it involves verifying that the recorded purchases are supported by actual invoices. This process ensures that the transactions are valid and properly recorded in the accounting system.

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  • 47. 

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

    • Indication of the likelihood of financial problems.

    • Indication where errors exist in the statements.

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

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

    Correct Answer
    A. Indication of the likelihood of financial problems.
    Explanation
    Comparing the client's data with industry averages can provide an indication of the likelihood of financial problems. By comparing the client's performance to industry standards, any significant deviations or discrepancies can be identified. If the client's data consistently falls below industry averages, it could suggest potential financial problems or challenges that need to be addressed. This comparison helps to assess the client's financial health and identify areas where improvements or corrective measures may be necessary.

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  • 48. 

    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

    • Yes Yes

    • No No

    • Yes No

    • No Yes

    Correct Answer
    A. Yes No
    Explanation
    Auditors must make decisions regarding the sample size of evidence to gather. This decision involves determining the number of items or transactions to be tested in order to obtain sufficient and appropriate evidence. On the other hand, the timing of audit procedures is not directly related to the decision of what evidence to gather and how much to accumulate.

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  • 49. 

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

    • Foot – reperformance.

    • Compare – documentation.

    • Vouch – documentation.

    • Trace – analytical procedures.

    Correct Answer
    A. Trace – analytical procedures.
    Explanation
    The given answer "Trace - analytical procedures" is not a correct combination of terms and related type of audit evidence because trace is a type of audit procedure that involves examining individual transactions or items to determine if they have been accurately recorded, while analytical procedures involve the analysis of financial information through comparisons and relationships to identify potential issues or discrepancies. Therefore, trace should be paired with documentation, as it involves examining supporting documents, not analytical procedures.

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Quiz Review Timeline (Updated): Mar 22, 2023 +

Our quizzes are rigorously reviewed, monitored and continuously updated by our expert board to maintain accuracy, relevance, and timeliness.

  • Current Version
  • Mar 22, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Dec 12, 2011
    Quiz Created by
    Kosdaisy
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