CHAPTER 6

Multiple-Choice Questions
1. The objective of the ordinary audit of financial statements is the expression of an opinion on:
easy a. the fairness of the financial statements.
a b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the balance sheet and income statement.
2.
easy
f the auditor believes that the financial statements are not fairly stated or is unable to reach an
conclusion because of insufficient evidence! the auditor:
c a. should "ithdra" from the en#a#ement.
b. should re$uest an increase in audit fees so that more resources can be used to conduct the
audit.
c. has the responsibility of notifyin# financial statement users throu#h the auditor%s report.
d. should notify re#ulators of the circumstances.
&. 'uditors accumulate evidence to:
easy a. defend themselves in the event of a la"suit.
d b. justify the conclusions they have other"ise reached.
c. satisfy the re$uirements of the (ecurities 'cts of 1)&& and 1)&*.
d. enable them to reach conclusions about the fairness of the financial statements.
*.
easy
The responsibility for adoptin# sound accountin# policies and maintainin# ade$uate internal
control rests "ith the:
b a. board of directors.
b. company mana#ement.
c. financial statement auditor.
d. company%s internal audit department.
+.
easy
The auditor%s best defense "hen material misstatements are not uncovered is to have conducted
the audit:
a a. in accordance "ith auditin# standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an ade$uate investi#ation of the mana#ement team.
,.
easy
f mana#ement insists on financial statement disclosures that the auditor finds unacceptable! the
auditor can:
d a. issue an adverse audit report.
b. issue a $ualified audit report.
c. "ithdra" from the en#a#ement.
d. choose any of these three courses of action.
-.
easy
f mana#ement insists on financial statement disclosures that the auditor finds unacceptable! the
auditor can do all but "hich of the follo"in#.
b a. ssue an adverse audit report.
b. ssue a disclaimer of opinion.
c. /ithdra" from the en#a#ement.
d. ssue a $ualified audit report.
,-1
0.
easy
/hich of the follo"in# is not one of the reasons that auditors provide only reasonable
assurance on the financial statements.
d a. The auditor commonly examines a sample! rather than the entire population of
transactions.
b. 'ccountin# presentations contain complex estimates "hich involve uncertainty.
c. 1raudulently prepared financial statements are often difficult to detect.
d. 'uditors believe that reasonable assurance is sufficient in the vast majority of cases.
). 23ublic4
easy
n certifyin# their annual financial statements! the C56 and C16 of a public company certify
that the financial statements comply "ith the re$uirements of:
c a. 7''3.
b. the (arbanes-6xley 'ct.
c. the (ecurities 5xchan#e 'ct of 1)&*.
d. 7''(.
18. /hich of the follo"in# statements is most correct re#ardin# errors and fraud.
easy a. 'n error is unintentional! "hereas fraud is intentional.
a b. 1rauds occur more often than errors in financial statements.
c. 5rrors are al"ays fraud and frauds are al"ays errors.
d. 'uditors have more responsibility for findin# fraud than errors.
11. 2(694 /hich of the follo"in# statements is true of a public company%s financial statements.
easy a. (arbanes-6xley re$uires the C56 only to certify the financial statements.
c b. (arbanes-6xley re$uires the C16 only to certify the financial statements.
c. (arbanes-6xley re$uires the C56 and C16 to certify the financial statements.
d. (arbanes-6xley neither re$uires the C56 nor the C16 to certify the financial statements.
12. /hich of the follo"in# is not one of the three cate#ories of assertions.
easy a. 'ssertions about classes of transactions and events for the period under audit
b b. 'ssertions about financial statements and correspondence to 7''3
c. 'ssertions about account balances at period end
d. 'ssertions about presentation and disclosure
1&.
easy
f a short-term note payable is included in the accounts payable balance on the financial
statement! there is a violation of the:
d a. completeness assertion.
b. existence assertion.
c. cutoff assertion.
d. classification and understandability assertion.
1*. 3rofessional s:epticism re$uires auditors to possess a2n4 ;;;;;; mind.
easy a. introspective
b b. $uestionin#
c. intelli#ent
d. unbelievin#
1+.
easy
c
The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
that misstatements! "hether caused by errors or fraud! that are not ;;;;;;;; are detected.
a. important to the financial statements
b. statistically si#nificant to the financial statements
c. material to the financial statements
d. identified by the client
,-2
1,. 1raudulent financial reportin# is most li:ely to be committed by "hom.
easy a. <ine employees of the company.
c b. 6utside members of the company%s board of directors.
c. Company mana#ement.
d. The company%s auditors.
1-. /hich of the follo"in# "ould most li:ely be deemed a direct-effect ille#al act.
easy a. =iolation of federal employment la"s.
c b. =iolation of federal environmental re#ulations.
c. =iolation of federal income tax la"s.
d. =iolation of civil ri#hts la"s.
10. The concept of reasonable assurance indicates that the auditor is:
easy a. not an insurer of the correctness of the financial statements.
a b. not responsible for the fairness of the financial statements.
c. responsible only for issuin# an opinion on the financial statements.
d. responsible for findin# all misstatements.
1). Tests of details of balances are specific procedures intended to:
easy a. test for monetary errors in the financial statements.
a b. prove that the accounts "ith material balances are classified correctly.
c. prove that the trial balance is in balance.
d. identify the details of the internal control system.
28. /hich of the follo"in# is the auditor least li:ely to do "hen a"are of an ille#al act.
easy a. >iscuss the matter "ith the client%s le#al counsel.
c b. 6btain evidence about the potential effect of the ille#al act on the financial statements.
c. Contact the local la" enforcement officials re#ardin# potential criminal "ron#doin#.
d. Consider the impact of the ille#al act on the relationship "ith the company%s mana#ement.
21.
medium
c
The auditor #ives an audit opinion on the fair presentation of the financial statements and
associates his or her name "ith it "hen! on the basis of ade$uate evidence! the auditor
concludes that the financial statements are unli:ely to mislead:
a. investors.
b. mana#ement.
c. a prudent user.
d. the reader.
22.
medium
The responsibility for the preparation of the financial statements and the accompanyin#
footnotes belon#s to:
b a. the auditor.
b. mana#ement.
c. both mana#ement and the auditor e$ually.
d. mana#ement for the statements and the auditor for the notes.
2&. /hen en#a#ed to audit the financial statements! it is acceptable for the auditor to prepare:
medium a. the financial statements for the client.
d b. the footnotes for the client.
c. a draft of the financial statements for the client.
d. a draft of the financial statements and footnotes for the client.
2*.
medium
The auditor has considerable responsibility for notifyin# users as to "hether or not the
statements are properly stated. This imposes upon the auditor a duty to:
a a. provide reasonable assurance that material misstatements "ill be detected.
b. be a #uarantor of the fairness in the statements.
c. be e$ually responsible "ith mana#ement for the preparation of the financial statements.
d. be an insurer of the fairness in the statements.
,-&
2+.
medium
?The auditor should not assume that mana#ement is dishonest! but the possibility of dishonesty
must be considered.@ This is an example of:
b a. unprofessional behavior.
b. an attitude of professional s:epticism.
c. due dili#ence.
d. a rule in the 'C3'%s Code of Professional Conduct.
2,.
medium
f the auditor "ere responsible for ma:in# certain that all of mana#ement%s assertions in the
financial statements "ere absolutely correct:
d a. ban:ruptcies could no lon#er occur.
b. ban:ruptcies "ould be reduced to a very small number.
c. audits "ould be much easier to complete.
d. audits "ould not be economically feasible.
2-.
medium
The auditor%s best defense "hen existin# material misstatements in the financial statements are
not uncovered in the audit is:
d a. the audit "as conducted in accordance "ith #enerally accepted accountin# principles.
b. the financial statements are client%s responsibility.
c. client is #uilty of contributory ne#li#ence.
d. none of the above.
20. 1raudulent financial reportin# is often called:
medium a. mana#ement fraud.
a b. theft of assets.
c. defalcation.
d. embeAAlement.
2). /hich of the follo"in# statements is true.
medium a. t is usually easier for the auditor to uncover frauds than errors.
b b. t is usually easier for the auditor to uncover errors than frauds.
c. t is usually e$ually difficult for the auditor to uncover errors or frauds.
d. Bsually! none of the above statements is true.
&8.
medium
'uditin# standards ma:e ;;;;; distinction2s4 bet"een the auditor%s responsibilities for
searchin# for errors and fraud.
c a. little
b. a si#nificant
c. no
d. various
&1.
medium
n comparin# mana#ement fraud "ith employee fraud! the auditor%s ris: of failin# to discover
the fraud is:
b a. #reater for mana#ement fraud because mana#ers are inherently more deceptive than
employees.
b. #reater for mana#ement fraud because of mana#ement%s ability to override existin#
internal controls.
c. #reater for employee fraud because of the hi#her crime rate amon# blue collar "or:ers.
d. #reater for employee fraud because of the lar#er number of employees in the or#aniAation.
,-*
&2.
medium
/hich of the follo"in# statements is correct "ith respect to the auditor%s responsibilities
relative to the detection of indirect-effect ille#al acts.
a a. The auditor has no responsibility for searchin# for indirect-effect ille#al acts.
b. The auditor has the same responsibility for searchin# for indirect-effect ille#al acts as any
other potential misstatement that may occur.
c. 'uditors have responsibility for searchin# for any ille#al act! "hether direct-effect or
indirect-effect.
d. Cone of the above is correct.
&&.
medium
/hen comparin# the auditor%s responsibility for detectin# employee fraud and for detectin#
errors! the profession has placed the responsibility:
c a. more on discoverin# errors than employee fraud.
b. more on discoverin# employee fraud than errors.
c. e$ually on discoverin# either one.
d. on the senior auditor for detectin# errors and on the mana#er for detectin# employee fraud.
&*.
medium
f several employees collude to falsify documents! the chance a normal audit "ould uncover
such acts is:
a a. very lo".
b. very hi#h.
c. Aero.
d. none of the above.
&+.
medium
/hen plannin# the audit! if the auditor has no reason to believe that ille#al acts exist! the
auditor should:
d a. include audit procedures "hich have a stron# probability of detectin# ille#al acts.
b. still include some audit procedures desi#ned specifically to uncover ille#alities.
c. i#nore the issue.
d. ma:e in$uiries of mana#ement re#ardin# their policies for detectin# and preventin# ille#al
acts and re#ardin# their :no"led#e of violations! and then rely on normal audit procedures
to detect errors! irre#ularities! and ille#alities.
&,. /hen the auditor has reason to believe an ille#al act has occurred! the auditor should:
medium a. in$uire of mana#ement at a level above those li:ely to be involved "ith the ille#ality.
d b. consult "ith the client%s le#al counsel.
c. consider accumulatin# additional evidence to determine if there is actually an ille#al act.
d. do all three of the above.
&-. /hen the auditor :no"s that an ille#al act has occurred! the auditor must:
medium a. report it to the proper #overnmental authorities.
b b. consider the effects on the financial statements! includin# the ade$uacy of disclosure.
c. "ithdra" from the en#a#ement.
d. issue an adverse opinion.
&0. 23ublic4 f an auditor uncovers an ille#al act at a public company! the auditor must notify:
medium a. local la" enforcement officials.
c b. the 3ublic Company 'ccountin# 6versi#ht Doard.
c. the (ecurities and 5xchan#e Commission.
d. all of the above.
&). /hy does the auditor divide the financial statements into smaller se#ments.
medium a. Bsin# the cycle approach ma:es the audit more mana#eable.
a b. Most accounts have fe" relationships "ith others and so it is more efficient to brea: the
financial statements into smaller pieces.
c. The cycle approach is used because auditin# standards re$uire it.
d. 'll of the above are correct.
,-+
*8.
medium
/hy does the auditor divide the financial statements into se#ments around the financial
statement cycles.
b a. Most auditors are trained to audit cycles as opposed to entire financial statements.
b. The approach aids in the assi#nment of tas:s to different members of the audit team.
c. The cycle approach is re$uired by auditin# standards.
d. Cone of the above is correct.
*1. The most important #eneral led#er account included in and affectin# several cycles is the:
medium a. cash account.
a b. inventory account.
c. income tax expense and liability accounts.
d. retained earnin#s account.
*2. Mana#ement assertions are:
medium
a
a. implied or expressed representations about accounts! transactions! and disclosures in the
financial statements.
b. stated in the footnotes to the financial statements.
c. explicitly expressed representations about the financial statements.
d. provided to the auditor in the assertions letter! but are not disclosed on the financial
statements.
*&. /hich of the follo"in# statements is not true.
medium
c
a. 'uditors have found that the most effective "ay to conduct audits is to audit the balance
sheet and use analytical procedures only for other financial statements.
b. 'uditors have found that the most efficient "ay to conduct audits is to audit the balance
sheet and use analytical procedures only for other financial statements.
c. 'uditors have found that the most efficient and effective "ay to conduct audits is to obtain
some combination of assurance for each class of transactions and for the endin# balance in
the related account.
d. 'uditors have found that the most efficient and effective "ay to conduct audits is to obtain
some combination of assurance for specified classes of transactions only.
**. /hich of the follo"in# statements is true.
medium a. 'udit objectives follo" and are closely related to mana#ement assertions.
a b. Mana#ement%s assertions follo" and are closely related to the audit objectives.
c. The auditor%s primary responsibility is to find and disclose fraudulent mana#ement
assertions.
d. 'ssertions about presentation and disclosure deal "ith "hether the accounts have been
included in the financial statements at appropriate amounts.
*+.
medium
/hich of the follo"in# statements is true re#ardin# the distinction bet"een #eneral audit
objectives and specific audit objectives for each account balance.
b a. The specific audit objectives are applicable to every account balance on the financial
statements.
b. The #eneral audit objectives are applicable to every account balance on the financial
statements.
c. The #eneral audit objectives are stated in terms tailored to the en#a#ement.
d. 'll of the above statements are true.
*,. /hich of the follo"in# statements about the existence and completeness assertions is not true.
medium a. The existence and completeness assertions emphasiAe different audit concerns.
c b. 5xistence deals "ith overstatements and completeness deals "ith understatements.
c. 5xistence deals "ith understatements and completeness deals "ith overstatements.
d. The completeness assertion deals "ith unrecorded transactions.
,-,
*-. The occurrence assertion applies to ;;;;;;;.
medium a. presentation and disclosure matters
b b. classes of transactions and events durin# the period
c. account balances
d. none of the above
*0.
medium
/hich of the follo"in# mana#ement assertions is not associated "ith transaction-related audit
objectives.
b a. 6ccurrence
b. Classification and understandability
c. 'ccuracy
d. Completeness
*). /hich of the follo"in# statements is not true.
medium a. Dalance-related audit objectives are applied to account balances.
d b. Transaction-related audit objectives are applied to classes of transactions.
c. Dalance-related audit objectives are applied to the endin# balance in balance sheet
accounts.
d. Dalance-related audit objectives are applied to both be#innin# and endin# balances in
balance sheet accounts.
+8. n testin# for cutoff! the objective is to determine:
medium a. "hether all of the current period%s transactions are recorded.
b b. "hether transactions are recorded in the correct accountin# period.
c. a and b are correct.
d. neither a nor b is correct.
+1. The detail tie-in objective is not concerned that the details in the account balance:
medium a. a#ree "ith related subsidiary led#er amounts.
b b. are properly disclosed in accordance "ith 7''3.
c. foot to the total in the account balance.
d. a#ree "ith the total in the #eneral led#er.
+2. The detail tie-in is part of the;;;;;;; assertion for account balances.
medium a. classification
b b. valuation and allocation
c. ri#hts and obli#ations
d. completeness
+&.
medium
/hich of the follo"in# is not a proper match of a transaction-related audit objective and
mana#ement assertion.
a a. 'ccuracy and cutoff.
b. Classification and classification.
c. 3ostin# and summariAation "ith accuracy.
d. 6ccurrence and occurrence.
+*. /hich of the follo"in# statements is not correct.
medium a. There are many "ays an auditor can accumulate evidence to meet overall audit objectives.
d b. (ufficient appropriate evidence must be accumulated to meet the auditor%s professional
responsibility.
c. t is appropriate to minimiAe the cost of accumulatin# evidence.
d. 7atherin# evidence and minimiAin# costs are e$ually important considerations that affect
the approach the auditor selects.
,--
++. T"o overridin# considerations affect the many "ays an auditor can accumulate evidence:
medium
a
1. (ufficient appropriate evidence must be accumulated to meet the auditor%s
professional responsibility.
2. Cost of accumulatin# evidence should be minimiAed.
n evaluatin# these considerations:
a. the first is more important than the second.
b. the second is more important than the first.
c. they are e$ually important.
d. it is impossible to prioritiAe them.
+,.
medium
b
f the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements throu#h understandin# internal control! assessin# control ris:! testin#
controls! and analytical procedures! then the auditor:
a. can issue an un$ualified opinion.
b. can si#nificantly reduce other substantive tests.
c. can "rite the en#a#ement letter.
d. needs to do additional tests of controls so that the assurance level can be increased.
+-.
medium
d
'fter the auditor has completed all audit procedures! it is necessary to combine the information
obtained to reach an overall conclusion as to "hether the financial statements are fairly
presented. This is a hi#hly subjective process that relies heavily on:
a. #enerally accepted auditin# standards.
b. the 'C3'%s Code of Professional Conduct.
c. #enerally accepted accountin# principles.
d. the auditor%s professional jud#ment.
+0. /hich of the follo"in# combinations is correct.
medium a. 5xistence relates to "hether amounts included occurred.
c b. 6ccurrence relates to "hether balances exist.
c. 5xistence relates to "hether amounts included exist.
d. Cone of the above is true.
+).
medium
f an auditor conducted an audit in accordance "ith auditin# standards! "hich of the follo"in#
"ould the auditor li:ely detect.
b a. Bnrecorded transactions.
b. ncorrect postin#s of recorded transactions.
c. Counterfeit si#natures on paid chec:s.
d. 1raud involvin# collusion.
,8.
medium
/hich of the follo"in# statements best describes the auditor%s responsibility "ith respect to
ille#al acts that do not have a material effect on the client%s financial statements.
a a. 7enerally! the auditor is under no obli#ation to notify parties other than personnel "ithin
the client%s or#aniAation.
b. 7enerally! the auditor is under an obli#ation to see that stoc:holders are notified.
c. 7enerally! the auditor is obli#ated to disclose the relevant facts in the auditor%s report.
d. 7enerally! the auditor is expected to compel the client to adhere to re$uirements of the
1orei#n Corrupt 3ractices 'ct.
,-0
,1.
medium
/hich of the follo"in# statements best describes the auditor%s responsibility re#ardin# the
detection of fraud.
c a. The auditor is responsible for the failure to detect fraud only "hen such failure clearly
results from nonperformance of audit procedures specifically described in the en#a#ement
letter.
b. The auditor must extend auditin# procedures to actively search for evidence of fraud in all
situations.
c. The auditor must extend auditin# procedures to actively search for evidence of fraud
"here the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only "hen an un$ualified opinion
is issued.
,2. The essence of the attest function is to:
medium a. assure the consistent application of correct accountin# procedures.
b b. determine "hether the client%s financial statements are fairly stated.
c. examine individual transactions so that the auditor may certify as to their validity.
d. detect collusion and fraud.
,&.
medium
The primary difference bet"een an audit of the balance sheet and an audit of the income
statement is that the audit of the income statement deals "ith the verification of:
a a. transactions.
b. authoriAations.
c. costs.
d. cutoffs.
,*.
challen#in#
The auditor%s evaluation of the li:elihood of material employee fraud is normally done initially
as a part of:
c a. tests of controls.
b. tests of transactions.
c. understandin# the entity%s internal control.
d. the assessment of "hether to accept the audit en#a#ement.
,+.
challen#in#
/hen usin# the cycle approach to se#mentin# the audit! the reason for treatin# capital
ac$uisition and repayment separately from the ac$uisition of #oods and services is that:
c a. the transactions are related to financin# a company rather than to its operations.
b. most capital ac$uisition and repayment cycle accounts involve fe" transactions! but each
is often hi#hly material and therefore should be audited extensively.
c. both a and b are correct.
d. neither a nor b is correct.
,,. lle#al acts are defined in ('( +* 2'B21-4 as:
challen#in# a. violations of la"s or #overnment re#ulations.
c b. violations of la"s or #overnment re#ulations other than errors.
c. violations of la"s or #overnment re#ulations other than fraud.
d. violations of la" "hich "ould result in the arrest of the perpetrator.
,-. Most ille#al acts affect the financial statements:
challen#in# a. directly.
b b. only indirectly.
c. both directly and indirectly.
d. materially if directE immaterially if indirect.
,-)
,0. /ith respect to the detection of ille#al acts! auditin# standards state that the auditor provides:
challen#in# a. no assurance that they "ill be detected.
a b. the same reasonable assurance provided for other items.
c. assurance that they "ill be detected! if material.
d. assurance that they "ill be detected! if hi#hly material.
,).
challen#in#
n describin# the cycle approach to se#mentin# an audit! "hich of the follo"in# statements is
not true.
d a. 'll #eneral led#er accounts and journals are included at least once.
b. (ome journals and #eneral led#er accounts are included in more than one cycle.
c. The ?capital ac$uisition and repayment@ cycle is closely related to the ?ac$uisition of
#oods and services and payment@ cycle.
d. The ?inventory and "arehousin#@ cycle may be audited at any time durin# the en#a#ement
since it is unrelated to the other cycles.
-8. /hich of the follo"in# journals "ould be included most often in the various audit cycles.
challen#in# a. Cash receipts journal.
c b. Cash disbursements journal.
c. 7eneral journal.
d. (ales journal.
-1. Transaction cycles be#in and end:
challen#in# a. at the be#innin# and end of the fiscal period.
d b. at the balance sheet date.
c. at Fanuary 1 and >ecember &1.
d. at the ori#in and final disposition of the company.
-2.
challen#in#
'fter #eneral audit objectives are understood! specific audit objectives for each account balance
on the financial statements can be developed. /hich of the follo"in# statements is true.
a a. There should be at least one specific objective for each relevant #eneral objective.
b. There "ill be only one specific objective for each relevant #eneral objective.
c. There "ill be many specific objectives developed for each relevant #eneral objective.
d. There must be one specific objective for each #eneral objective.
-*.
challen#in#
'n auditor should reco#niAe that the application of auditin# procedures may produce evidence
indicatin# the possibility of errors or fraud and therefore should:
a a. plan and perform the en#a#ement "ith an attitude of professional s:epticism.
b. not rely on internal controls that are desi#ned to prevent or detect errors or fraud.
c. desi#n audit tests to detect unrecorded transactions.
d. extend the "or: to audit most recorded transactions and records of an entity.
5ssay Questions
-+.
easy
>iscuss the differences bet"een errors! frauds! and ille#al acts. 7ive an example of each.
'ns"er:
The primary difference bet"een errors and frauds is that errors are unintentional
misstatements of the financial statements! "hereas frauds are intentional misstatements.
lle#al acts are violations of la"s or #overnment re#ulations! other than frauds. 'n
example of an error is a mathematical mista:e "hen footin# the columns in the sales
journal. 'n example of a fraud is the creation of fictitious accounts receivable. 'n example
of an ille#al act is the dumpin# of toxic "aste in violation of the federal environmental
protection la"s.
,-18
-,.
medium
>iscuss the actions an auditor should ta:e "hen the auditor discovers an ille#al act.
'ns"er:
The auditor should first consider the effects of the ille#al act on the financial statements!
includin# the ade$uacy of disclosures. f the auditor concludes that disclosures are
inade$uate! the audit report should be modified accordin#ly. The auditor should also
consider the effect of the ille#al act on its relationship "ith mana#ement! and
mana#ement%s trust"orthiness. Cext! the client%s audit committee or others of e$uivalent
authority should be informed of the ille#al act. f the client does not deal "ith the ille#al
act in a satisfactory manner! the auditor should consider "ithdra"in# from the
en#a#ement. 1inally! if the client is publicly held! the auditor may need to report the matter
to the (5C.
--.
medium
There are three broad cate#ories of mana#ement assertions. dentify each of these cate#ories.
'ns"er:
'ssertions about classes of transactions and events for the period under audit.
'ssertions about account balances at period end.
'ssertions about presentation and disclosure.
-0.
medium
Driefly explain each mana#ement assertion related to classes of transactions and events for the
period under audit.
'ns"er:
Occurrence. Transactions and events that have been recorded have occurred and
pertain to the entity.
Completeness. 'll transactions and events that should have been recorded have been
recorded.
Accuracy. 'mounts and other data relatin# to recorded transactions and events have
been recorded appropriately.
Classification. Transactions and events have been recorded in the proper accounts.
Cutoff. Transactions and events have been recorded in the correct accountin# period.
-).
medium
Driefly explain each mana#ement assertion related to account balances at period end.
'ns"er:
Existence. 'ssets! liabilities! and e$uity interests exist.
Completeness. 'll assets! liabilities! and e$uity interests that should have been
recorded have been recorded.
Valuation and allocation. 'ssets! liabilities! and e$uity interests are included in the
financial statements at appropriate amounts and any resultin# valuation adjustments
are appropriately recorded.
Rights and obligations. The entity holds or controls the ri#hts to assets! and liabilities
are the obli#ation of the entity.
,-11
08.
medium
Driefly explain each mana#ement assertion related to presentation and disclosure.
'ns"er:
Occurrence and rights and obligations. >isclosed events and transactions have
occurred and pertain to the entity.
Completeness. 'll disclosures that should have been included in the financial
statements have been included.
Accuracy and valuation. 1inancial and other information are disclosed appropriately
and at appropriate amounts.
Classification and understandability. 1inancial and other information is appropriately
presented and described and disclosures are clearly expressed.
01.
medium
>iscuss three reasons "hy auditors are responsible for ?reasonable@ but not ?absolute@
assurance.
'ns"er:
Most audit evidence results from testin# a sample of a population. (amplin# involves
some ris: of not uncoverin# material misstatements.
'ccountin# presentations contain complex estimates! "hich inherently involve
uncertainty and can be affected by future events. 's a result! the auditor has to rely on
evidence that is persuasive but not convincin#.
1raudulently prepared financial statements are often very difficult for the auditor to
detect! especially "hen there is collusion amon# mana#ement.
02.
medium
>istin#uish bet"een mana#ement%s responsibility and the auditor%s responsibility for the
financial statements under audit.
'ns"er:
Mana#ement is responsible for adoptin# appropriate accountin# policies! maintainin#
ade$uate internal control! and ma:in# fair representations in the financial statements. The
auditor%s responsibility is to perform an audit desi#ned to provide reasonable assurance of
detectin# any material misstatements in the financial statements and to express an opinion
on those financial statements at the conclusion of the audit.
0&.
medium
n the context of the audit of sales! distin#uish bet"een the existence and completeness
transaction-related audit objectives. (tate the effect on the sales account 2overstatement or
understatement4 of a violation of each objective.
'ns"er:
/hen testin# the existence objective for sales! the auditor%s focus is on "hether the sales
that have been recorded in the sales journal actually occurred. n contrast! tests of the
completeness objective are concerned "ith determinin# "hether all sales that actually
occurred have been recorded in the sales journal. =iolations of the existence objective
result in overstatements of salesE violations of the completeness objective result in
understatements of sales..
,-12
0*.
challen#in#
>iscuss the differences in the auditor%s responsibilities for discoverin# 214 material errors! 224
material fraud 2&4 direct-effect ille#al acts! and 2*4 indirect-effect ille#al acts.
'ns"er:
'uditin# standards ma:e no distinction bet"een the auditorGs responsibilities for searchin#
for errors and fraud. n either case! the auditor must obtain reasonable assurance about
"hether the statements are free of material misstatements. The standards also reco#niAe
that fraud is often more difficult to detect because mana#ement or the employees
perpetratin# the fraud attempt to conceal the fraud. (till! the difficulty of detection does
not chan#e the auditorGs responsibility to properly plan and perform the audit to detect
material misstatements! "hether caused by error or fraud. The auditor%s responsibility for
uncoverin# direct-effect ille#al acts is the same as for errors and fraud. Ho"ever! the
auditor is not re$uired to search for indirect-effect ille#al acts unless there is reason to
believe they exist.
0+.
challen#in#
' financial statement audit typically consists of four phases. dentify each of these four phases
of an audit and discuss the major activities performed by the auditor in each phase.
'ns"er:
Phase I Plan and design an audit approach. n this phase! the auditor obtains an
understandin# of the client%s entity and its environment. n addition! the auditor obtains an
understandin# of the client%s internal control and assesses the ris: of material
misstatement.
Phase II Perform tests of controls and substantive tests of transactions. n this phase! the
auditor tests those internal controls heIshe believes may be effective at preventin# or
detectin# misstatements. n addition! the auditor performs substantive tests of transactions
to verify the monetary amounts of transactions.
Phase III Perform analytical procedures and tests of details of balances. n this phase! the
auditor performs analytical procedures to assess the overall reasonableness of transactions
and balances. n addition! tests of details of balances are performed to test for monetary
misstatements in the financial statements.
Phase IV Complete the audit and issue an audit report. n the last phase of the audit! the
information obtained in the previous phases is combined to reach an overall conclusion as
to "hether the financial statements are fairly presented. 'n audit report is then issued
based on this conclusion.
0,.
challen#in#
>iscuss some precautionary actions an auditor should ta:e "hen there is a moderate or hi#h ris:
of mana#ement fraud.
'ns"er:
(ome precautionary actions an auditor should ta:e "hen there is a moderate or hi#h ris: of
mana#ement fraud include:
Critically challen#in# the client%s choice of accountin# principles.
'ssi#nin# more experienced personnel to the en#a#ement.
>oin# more audit "or: at year-end instead of at interim dates.
Closely supervisin# assistants and other inexperienced staff.
3erformin# additional or more effective audit procedures.
n extreme situations! the auditor should consider "ithdra"in# from the en#a#ement.
,-1&
6ther 6bjective 'ns"er 1ormat Questions
0-.
medium
Match seven of the terms 2a-:4 "ith the definitions provided belo" 21--4:
a. Tests of details of balances
b. Tests of controls
c. (ubstantive tests of transactions
d. 'nalytical procedures
e. Transaction-related audit objectives
f. Mana#ement assertions
#. Dalance-related audit objectives
h. 1raud
i. lle#al act
j. 5rror
:. Mana#ement fraud
h 1. 'n intentional misstatement of the financial statements.
e 2. ' set of six audit objectives the auditor must meet! includin# timin#! postin# and
summariAation! and accuracy.
f &. mplied or expressed representations made by the client about classes of
transactions! account balances and disclosures in the financial statements.
a *. 'udit procedures testin# for monetary misstatements to determine "hether the
balance-related audit objectives have been satisfied for each si#nificant account
balance.
# +. ' set of nine audit objectives the auditor must meet! includin# completeness!
detail tie-in! and ri#hts and obli#ations.
b ,. 'udit procedures desi#ned to test the effectiveness of control policies and
procedures.
d -. Bse of comparisons and relationships to assess "hether account balances or
other data appears reasonable.
00.
challen#in#
Delo" are five audit procedures! all of "hich are tests of transactions associated "ith the audit of
the sales and collection cycle. 'lso belo" are the six #eneral transaction-related audit objectives
and the five mana#ement assertions. 1or each audit procedure! indicate 214 its audit objective! and
224 the mana#ement assertion bein# tested.
'udit 6bjectives 'ssertions
'. 6ccurrence =. 6ccurrence
D. Completeness /. Completeness
C. 'ccuracy 9. 'ccuracy
>. 3ostin# and summariAation J. Classification
5. Classification K. Cutoff
1. Timin#
,-1*
1. =ouch recorded sales from the sales journal to the file of bills of ladin#.
' 214 .
= 224 .
2. Compare dates on the bill of ladin#! sales invoices! and sales journal to test for delays in
recordin# sales transactions.
1 214 .
K 224 .
&. 'ccount for the se$uence of prenumbered bills of ladin# and sales invoices.
D 214 .
/ 224 .
*. Trace from a sample of prelistin#s of cash receipts to the cash receipts journal! testin# for
names! amounts! and dates.
D! C 214 .
/! 9 224 .
+. 5xamine customer order forms for credit approval by the credit mana#er.
' 214 .
= 224 .
0).
challen#in#
Delo" are five audit procedures! all of "hich are tests of transactions associated "ith the audit of
the ac$uisition and payment cycle. 'lso belo" are the six #eneral transaction-related audit
objectives and the five mana#ement assertions. 1or each audit procedure! indicate 214 its audit
objective! and 224 the mana#ement assertion bein# tested.
6bjectives 'ssertions
'. 6ccurrence=. 6ccurrence
D. Completeness /. Completeness
C. 'ccuracy 9. 'ccuracy
>. 3ostin# and summariAation J. Classification
5. Classification K. Cutoff
1. Timin#
1. 1oot the purchases journal and trace the totals to the related #eneral led#er accounts.
> 214 .
9 224 .
2. Lecompute the cash discounts ta:en by the client.
C 214 .
9 224 .
&. Compare dates on cancelled chec:s "ith the ban: cancellation date.
1 214 .
K 224 .
*. Trace from a sample of cancelled chec:s to the cash disbursements journal.
D 214 .
/ 224 .
,-1+
+. 5xamine supportin# documentation for a sample of transactions for authoriAed payee and
amount and to determine services or #oods "ere received.
' 214 .
= 224 .
)8.
challen#in#
Delo" are five audit procedures! all of "hich are tests of balances associated "ith the audit of
accounts receivable. 'lso belo" are the ei#ht #eneral balance-related audit objectives and the four
mana#ement assertions. 1or each audit procedure! indicate 214 its audit objective! and 224 the
mana#ement assertion bein# tested.
6bjectives 'ssertions
'. 5xistence =. 5xistence
D. Completeness /. Completeness
C. 'ccuracy 9. =aluation and allocation
>. Classification J. Li#hts and obli#ations
5. Cutoff
1. >etail tie-in
7. LealiAable value
H. Li#hts and obli#ations
1. 6btain an a#ed listin# of accounts receivable. 1or a sample of individual customers on the
listin#! a#ree the customer%s name! amount! and other information "ith the correspondin#
information in the accounts receivable master file.
1 214 .
9 224 .
2. 5xamine details of sales for five days before and five days after year-end to determine
"hether sales have been recorded in the proper period.
5 214 .
9 224 .
&. 'ssess the reasonableness of the balance in the allo"ance for doubtful accounts.
7 214 .
9 224 .
*. n$uire as to "hether any accounts receivable have been factored or sold durin# the period.
H 214 .
J 224 .
+. n$uire as to "hether there are any receivables from related parties.
> 214 .
9 224 .
)1.
easy
b
Lesponsibility for the fair presentation of financial statements rests e$ually "ith mana#ement and
the auditor.
a. True
b. 1alse
)2.
easy
b
5rrors are usually more difficult for an auditor to detect than frauds.
a. True
b. 1alse
,-1,
)&.
easy
b
'uditors have found that the most efficient "ay to conduct audits is to focus primarily on testin#
classes of transactions and performin# minimal or no tests of endin# account balances.
a. True
b. 1alse
)*.
easy
a
/hen an auditor has reduced assessed control ris: based on tests of controls! he or she may then
reduce the extent to "hich the accuracy of the financial statement information directly related to
those controls must be supported throu#h the accumulation of evidence usin# substantive tests.
a. True
b. 1alse
)+.
easy
b
Tests of details of balances typically involve the use of comparisons and relationships to assess the
overall reasonableness of account balances.
a. True
b. 1alse
),.
easy
a
6ther than in$uirin# of mana#ement about policies they have established to prevent ille#al acts and
"hether mana#ement :no"s of any la"s or re#ulations that the company has violated! the auditor
should not search for indirect-effect ille#al acts unless there is reason to believe they may exist.
a. True
b. 1alse
)-.
easy
a
/hen an auditor believes that an ille#al act may have occurred! the first step he or she should ta:e
is to in$uire of mana#ement at a level above those li:ely to be involved in the potential ille#al act.
a. True
b. 1alse
)0.
medium
b
'udits are expected to provide a hi#her de#ree of assurance for the detection of material frauds than
is provided for an e$ually material error.
a. True
b. 1alse
)).
medium
a
'uditors have a hi#her de#ree of responsibility for detectin# direct-effect ille#al acts than indirect-
effect ille#al acts.
a. True
b. 1alse
188.
medium
b
The auditor%s first course of action "hen an ille#al act is uncovered should be to immediately notify
the appropriate authorities! includin# but not limited to the police! and for publicly held companies!
the (ecurities and 5xchan#e Commission.
a. True
b. 1alse
181.
medium
b
Bnder the cycle approach to se#mentin# an audit! transactions recorded in different journals should
never be combined "ith the #eneral led#er balances that result from those transactions.
a. True
b. 1alse
182.
medium
b
7eneral transaction-related audit objectives vary from audit to audit! dependin# on the nature and
characteristics of the client%s business and industry.
a. True
b. 1alse
,-1-
18&.
medium
a
The audit objective of postin# and summariAation is associated "ith the mana#ement assertion of
accuracy.
a. True
b. 1alse
18*.
medium
b
Dalance-related audit objectives are usually applied to the endin# balance in income statement
accountsE transaction-related audit objectives are usually applied to transactions reflected in balance
sheet accounts.
a. True
b. 1alse
18+.
medium
a
The transaction-related audit objective of timin# is related to the assertion of cutoff.
a. True
b. 1alse
18,.
medium
a
The effect of a violation of the existence transaction-related audit objective for the sales account
"ould be an overstatement of that account.
a. True
b. 1alse
18-.
medium
b
The effect of a violation of the completeness transaction-related audit objective for cash
disbursements transactions "ould be an overstatement of cash disbursements.
a. True
b. 1alse
180.
medium
b
The transaction-related audit objective that deals "ith "hether recorded transactions have actually
occurred is the completeness objective.
a. True
b. 1alse
18).
medium
a
The #eneral balance-related audit objective that deals "ith determinin# that details in the account
balance a#ree "ith related master file amounts! foot to the total in the account balance! and a#ree
"ith the total in the #eneral led#er is the detail tie-in objective.
a. True
b. 1alse
118.
medium
a
The cutoff objective! ?transactions near the balance sheet date are recorded in the proper period!@ is
a balance-related audit objective.
a. True
b. 1alse
111.
medium
b
1or a private company audit! tests of controls are normally performed only on those internal
controls the auditor believes have not been operatin# effectively durin# the period under audit.
a. True
b. 1alse
112.
medium
a
'n audit #enerally provides no assurance that indirect-effect ille#al acts "ill be detected.
a. True
b. 1alse
11&.
medium
a
/hen an auditor believes there is a moderate or hi#h ris: of mana#ement fraud! the auditor "ill
normally do less audit "or: at interim dates instead of at year-end.
a. True
b. 1alse
,-10
11*.
challen#in#
b
'n auditor must inform a client%s audit committee of an ille#al act discovered durin# an audit in
"ritin#.
a. True
b. 1alse
11+.
challen#in#
b
The objective of the audit of financial statements by an independent auditor is to verify that the
financial statements are free of misstatements and accurately represent the company%s financial
position and results of operations.
a. True
b. 1alse
11,.
challen#in#
a
The auditor%s responsibility for uncoverin# direct-effect ille#al acts is the same as for fraud.
a. True
b. 1alse
,-1)