Auditing Multiple Choice - Mid-term #2

Writing down obsolete inventory prior to year end.

Failing to correct weaknesses in the client’s internal control.

An unexplained increase in gross margin.

Borrowing money at a rate significantly below the market rate.

$ 10,000

$ 15,000

$ 20,000

$ 25,000

Yes, No, Yes

No, Yes, No

No, Yes, Yes

Yes, No, No

Tests of details of balances

Substantive tests of transactions

Tests of controls

Tests of trends and ratios

The documents related to the chosen sample may not be available to the auditor for inspection.

An auditor may fail to recognize errors in the documents from the sample.

A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.

An auditor may select audit procedures that are not appropriate to achieve the specific objective.

Arrange to make copies, for inclusion in the audit files, of those client supporting documents examined by the auditor.

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

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

Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

A reasonable degree of assurance that the client’s internal controls are operating effectively on a consistent basis throughout the year.

Sufficient, appropriate audit evidence to afford a reasonable basis for the auditor’s opinion, without the need for additional evidence.

Assurances that informative disclosures in the financial statements are reasonably adequate.

Knowledge and understanding of the client’s prescribed procedures and methods.

The predecessor’s work should be used.

The company follows the policy of rotating its auditors.

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

The engagement should be accepted.

Materiality is determined by reference to guidelines established by the AICPA.

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

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

Materiality is a matter of professional judgment.

Decrease detection risk.

Increase materiality levels.

Decrease substantive testing.

increase inherent risk.

Scope of the audit for specific accounts.

Specific transactions that should be reviewed.

Effects of audit exceptions upon the opinion.

Effects of the CPA’s direct financial interest in a client upon the CPA’s independence.

Materiality.

Comparative analysis.

Reasonable assurance.

Relative risk.

specialized accounting principles of the client’s industry.

the competency of the client’s internal audit staff.

the uncertainty inherent in applying sampling procedures.

Disagreements with management as to auditing procedures.

To comply with generally accepted accounting principles.

To obtain a measure of assurance of management’s efficiency.

To maintain a state of independence in mental attitude during the audit.

To determine the nature, timing, and extent of subsequent audit work.

Sending confirmation letters to banks.

Counting and listing cash on hand.

Examining signatures on checks.

Preparing reconciliations of bank accounts as of the balance sheet date.

Trace a sample of postings from the sales journal to the sales account in the general ledger.

Vouch a sample of recorded sales from the sales journal to shipping documents.

Prepare an aging of accounts receivable.

Trace a sample of initial sales orders to sales recorded in the sales journal.

Arise from the misapplication of auditing procedures.

May be assessed in either quantitative or nonquantitative terms.

Exist independently of the financial statement audit.

Can be changed at the auditor’s discretion.

Occurrence.

Accuracy.

Completeness.

Timing.

All controls related to the objectives of reliable financial reporting, efficiency and effectiveness of operations, and compliance with laws and regulations.

Controls solely related to the reliability of financial reporting objective.

Controls related to the compliance with laws and regulations objective.

Controls related to the reliability of financial reporting objective in addition to those controls related to operations and compliance with laws and regulations objectives that could materially effect financial reporting.

Minimize the failure to detect errors and fraud.

Eliminate the risk of nonsampling errors.

Design more effective audit procedures.

Measure the sufficiency of the audit evidence by quantifying sampling risk.

Substantive tests.

Test of controls.

Internal control.

Statistical analysis.

More than 6%.

Less than 6%.

More than 4%.

Less than 4%.

Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests.

Tests of controls include observations of the proper segregation of duties.

Tests of controls provide direct evidence about monetary misstatements in transactions.

Tests of controls ordinarily should be performed as of the balance sheet date or during the period subsequent to that date.

Tests of controls.

Substantive tests.

Tests of ratios.

Tests of details of balances.

I, II, III, and IV

I, III, IV, and II

III, IV, I, and II

IV, I, III, and II

Increase inherent risk.

Increase materiality levels.

Decrease substantive testing.

Decrease planned detection risk.

Accounts Receivable turnover

Earnings per Share

Gross Profit percent

Return on Assets before interest and taxes

An auditor during the typical obtaining of an understanding of internal control and assessment of control risk.

A controller when reconciling accounts in the general ledger.

Employees in the normal course of performing their assigned functions.

The chief financial officer when reviewing interim financial statements.

Tolerable exception rate.

Allowance for sampling risk.

Acceptable risk of assessing control risk too low.

Sample size.

confirming the existence of the related parties.

verifying the valuation of related party transactions.

Evaluating the disclosure of the related party transactions.

Ascertaining the rights and obligations of the related parties.

More than remotely adversely affects a company’s ability to initiate, authorize, record, process, or report external financial statements reliably.

Results in a reasonable possibility that internal control will not prevent or detect material financial statement misstatements.

Exists because a necessary control is missing or not properly defined.

Reduces the efficiency and effectiveness of the entity’s operations.

Sales invoices represent existing sales.

All sales have been recorded.

All sales invoices have been correctly posted to customer accounts.

Debit entries in the accounts receivable master file are correctly supported by sales invoices.

Auditor judgment

Materiality

Inherent risk

Reasonable assurance

Must communicate to management all deficiencies identified.

Must communicate both significant deficiencies and material weaknesses to those charged with governance.

May communicate orally or in writing to the board all significant deficiencies and material weaknesses identified.

Must issue an adverse opinion on the financial statements.

Credit manager

Sales manager

Accounts receivable clerk

Receptionist

Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.

Shipping documents and sales invoices are matched by an employee who does not have the authority to write off bad debts.

Employees involved in the credit-granting function are separated from the sales function.

Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

Auditor expresses a qualified opinion as a result of the specialist’s findings.

Specialist is not independent of the client.

Auditor wishes to indicate a division of responsibility.

Specialist’s work provides the auditor greater assurance of reliability.

Material weaknesses of internal control.

The predictability of financial data from individual transactions.

The various assertions that are embodied in the financial statements.

Areas that may represent specific risks relevant to the audit.

The likelihood of fraud is minimal.

There are no control deficiencies.

Internal control over financial reporting is operating effectively.

The financial statements are fairly presented in all material aspects.

Aged trial balance of accounts receivable is prepared.

Credit memoranda are prenumbered and all numbers are accounted for.

A reconciliation of the trial balance of customers’ accounts with the general ledger control is prepared periodically.

Receiving reports are prepared for all materials received and such reports are account for on a regular basis.

A test of details of balances.

A test of control.

A substantive test of transactions.

Both a test of control and a substantive test of transactions.

Increase.

Remain the same.

Decrease.

Become indeterminate.

Sample exception rate plus the allowance for sampling risk equals the tolerable rate.

Sample exception rate is less than the expected rate of exception used in planning the sample.

Tolerable rate less the allowance for sampling risk exceeds the sample exception rate.

Sample exception rate plus the allowance for sampling risk exceeds the tolerable rate.

Employment of competent personnel provides assurance that management’s control objectives will be achieved.

Establishment and maintenance of internal control is an important responsibility of management and not of the auditor.

Cost of internal control should not exceed the benefits expected to be derived therefrom.

Separation of incompatible functions is necessary to ascertain that the internal control is effective.

Increase.

Remain the same.

Decrease.

Become indetermnate.

Selecting accounts receivable for confirmation of account balances.

Inspecting employee time cards for proper approval by supervisors.

Making an independent estimate of the amount of a LIFO inventory.

Examining invoices in support of the valuation of fixed asset additions.

Cash receipts recorded in the cash receipts journal are reasonable.

Cash receipts are correctly classified.

Recorded cash receipts result from legitimate transactions.

Existing cash receipts are recorded.

All sales invoices are checked as to all details after their preparation.

Differences reported by customers are satisfactorily investigated.

Statistical sales data are compiled and reconciled with recorded sales.

All sales invoices are compared with the customers’ purchase orders.