front 1 The objective of an audit of the financial statements is an expression of an opinion on | back 1 the FAIRNESS of the financial statements in all material respects |
front 2 If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor | back 2 has the RESPONSIBILITY of notifying financial statement users through the auditor's report. |
front 3 Auditors accumulate evidence to | back 3 reach a CONCLUSION about the fairness of the financial statements |
front 4 Which of the following is not one of the steps used to develop audit objectives? | back 4 know the PROPER type of audit opinion to issue |
front 5 For publicly listed companies, the auditor also issues which of the following reports in addition to a report containing the auditor's opinion? | back 5 a report on INTERNAL CONTROL over financial reporting |
front 6 The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the | back 6 company MANAGEMENT |
front 7 If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or | back 7 Issue an adverse opinion YES Issue a qualified opinion YES |
front 8 In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of | back 8 the Securities Exchange Act of 1934 |
front 9 Which of the following statements is true of a public company's financial statements? | back 9 Sarbanes-Oxley requires BOTH the CEO and CFO to certify the financial statements. |
front 10 The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to | back 10 management |
front 11 Management is not responsible for which of the following? | back 11 ISSUING their own opinion on the fairness of the financial statements |
front 12 The auditor's best defense when material misstatements are not uncovered is to have conducted the audit | back 12 in ACCORDANCE with generally accepted auditing standards. |
front 13 Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? | back 13 Auditors believe that REASONABLE assurance is sufficient in the vast majority of cases. |
front 14 Which of the following statements is the most correct regarding errors and fraud? | back 14 An error is UNINTENTIONAL, whereas fraud is INTENTIONAL. |
front 15 When an auditor believes that an illegal act may have occurred, the auditor should first | back 15 OBTAIN an understanding of the nature and circumstances of the act. |
front 16 The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not ________ are detected. | back 16 MATERIAL to the financial statements |
front 17 Fraudulent financial reporting is most likely to be committed by whom? | back 17 company MANAGEMENT |
front 18 Which of the following would most likely be deemed a direct effect illegal act? | back 18 violation of federal INCOME TAX laws |
front 19 The concept of reasonable assurance indicates that the auditor is | back 19 not a guarantor of the CORRECTNESS of the financial statements. |
front 20 Which of the following is the auditor least likely to do when aware of an illegal act? | back 20 contact the local LAW ENFORCEMENT officials regarding potential criminal wrongdoing |
front 21 An auditor discovers that the company's bookkeeper unintentionally made a mistake in calculating the amount of the quarterly sales. This is an example of | back 21 an ERROR |
front 22 An auditor has a duty to | back 22 provide REASONABLE assurance that material misstatements will be detected. |
front 23 If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct, | back 23 audits would not be ECONOMICALLY practical. |
front 24 When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor | back 24 should INQUIRE OF MANAGEMENT about whether the entity is in compliance with such laws and regulations. |
front 25 Which of the following statements is usually true? | back 25 An item is considered material if it would likely have CHANGED or influenced the decisions of a reasonable person using the statements. |
front 26 Auditing standards make ________ distinction(s) between the auditor's responsibilities for searching for errors and fraud. | back 26 no |
front 27 In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is | back 27 greater for management fraud because of management's ability to OVERRIDE existing internal controls. |
front 28 Misappropriation of assets | back 28 causes harm to STOCKHOLDERS because the assets are no longer available to their rightful owners. |
front 29 When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility | back 29 EQUALLY on discovering errors and employee fraud. |
front 30 If there is collusion among management, the chance a normal audit would uncover such acts is | back 30 very LOW |
front 31 When the auditor becomes aware of or suspects noncompliance with laws and regulations, | back 31 A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit. B) the auditor should discuss the matter with management at a level above those suspected of the noncompliance. C) the auditor should obtain additional information to evaluate the possible effects on the financial statements. (all of the above) |
front 32 When the auditor identifies or suspects noncompliance with laws and regulations, the auditor | back 32 may DISCLAIM an opinion on the basis of scope limitations if he or she is precluded by management from obtaining sufficient appropriate evidence. |
front 33 When an auditor knows that an illegal act has occurred, he or she must | back 33 consider the EFFECTS on the financial statements, including the adequacy of disclosure. |
front 34 Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations? | back 34 The auditor's responsibility will depend on whether the laws or regulations are expected to have a DIRECT impact on the financial statements. |
front 35 Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements? | back 35 Generally, the auditor is under NO OBLIGATION to notify parties other than personnel within the client's organization. |
front 36 Which of the following statements best describes the auditor's responsibility regarding the detection of fraud? | back 36 The auditor is required to provide REASONABLE assurance that the financial statements are free of both material errors and fraud. |
front 37 When reporting identified or suspected noncompliance, | back 37 the auditor should COMMUNICATE all material noncompliance matters to those charged with governance. |
front 38 Another term for misappropriation of assets is | back 38 EMPLOYEE fraud. |
front 39 The provisions of many laws and regulations affect the financial statements | back 39 ONLY indirectly |
front 40 If a client has violated federal tax laws, | back 40 and the amount is SIGNIFICANT, the auditor should communicate with those charged with governance. |
front 41 In which of the following situations were the financial statements not misstated? | back 41 Assets were taken, but the ASSET MISAPPROPRIATION was discovered and appropriately disclosed in the financial statements. |
front 42 Discuss the differences between errors, frauds, and illegal acts. Give an example of each. | back 42 -errors are unintentional misstatements of the financial statements ex: a mathematical mistake when footing the columns in the sales journal -frauds are intentional misstatements ex: the creation of fictitious accounts receivable -Illegal acts are violations of laws or government regulations, other than frauds ex: dumping of toxic waste in violation of the federal environmental protection laws |
front 43 Discuss the actions an auditor should take when an illegal act is identified or suspected. | back 43 1. Obtain an understanding of the nature and circumstances of the act 2. Communicate with those charged with governance matters involving noncompliance with laws and regulations that came to the auditor's attention during the course of the audit 3. Identify whether a responsibility exists to report the identified or suspected noncompliance to parties outside the entity, such as regulatory authorities 4. If the noncompliance has a material effect and has not been adequately reflected in the financial statements, the auditor should express a qualified or adverse opinion |
front 44 Discuss three reasons why auditors are responsible for "reasonable" but not "absolute" assurance. | back 44 1. Most audit evidence results from testing a sample of a population. 2. Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events. 3. Fraudulently prepared financial statements are often very difficult for the auditor to detect, especially when there is collusion among management. |
front 45 An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and | back 45 a CRITICAL ASSESSMENT of the audit evidence. |
front 46 Which of the following is an accurate statement about professional skepticism? | back 46 Professional skepticism involves a CRITICAL ASSESSMENT of the evidence. |
front 47 One of the characteristics of professional skepticism is ________, which is the conviction to decide for oneself, rather than accepting the claims of others. | back 47 autonomy |
front 48 A questioning mindset | back 48 means the auditor should approach the audit with a "TRUST BUT VERIFY" mental outlook. |
front 49 One of the characteristics of professional skepticism is ________, which is a desire to investigate beyond the obvious. | back 49 a SEARCH for knowledge |
front 50 ________ is the self-confidence to resist persuasion and to challenge assumptions or conclusions. | back 50 self-esteem |
front 51 An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should | back 51 plan and perform the engagement with an attitude of PROFESSIONAL SKEPTICISM. |
front 52 Which of the following is not a characteristic of skepticism found in academic research on this subject? | back 52 depending upon OTHERS to decide for oneself |
front 53 Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism. List and briefly describe each of these characteristics. | back 53 1. Questioning mindset — a disposition to inquiry with some sense of doubt 2. Suspension of judgment — withholding judgment until appropriate evidence is obtained 3. Search for knowledge — a desire to investigate beyond the obvious, with a desire to corroborate 4. Interpersonal understanding— recognition that people's motivations and perceptions can lead them to provide biased or misleading information 5. Autonomy — the self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others 6. Self-esteem — the self-confidence to resist persuasion and to challenge assumptions or conclusions. |
front 54 The starting point to effective professional judgment begins with | back 54 identifying and defining the ISSUE |
front 55 Which of the following is not a step in the professional judgment process? | back 55 determine the type of audit OPINION |
front 56 ________ is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value. | back 56 anchoring |
front 57 When the auditor considers whether he or she understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he or she is performing which step in the professional judgment process? | back 57 performing the analysis and identifying potential ALTERNATIVES |
front 58 When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will | back 58 articulate in written form the RATIONALE of their judgment. |
front 59 Auditors should be alert for potential judgment tendencies, traps, and biases that may impact their decision-making process. Identify and define four of these judgment tendencies. Then, for each judgment tendency, suggest a way to avoid or mitigate the tendency. | back 59 1. Confirmation: the tendency to put more weight on information that is consistent with initial beliefs or preferences 2. Overconfidence: the tendency to overestimate one's own abilities to perform tasks or to make accurate assessments of risks or other judgments and decisions 3. Anchoring: the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from the initial value 4. Availability: the tendency to consider information that is easily retrievable or what's easily accessible as being more likely or more relevant |
front 60 Why does the auditor divide the financial statements into smaller segments? | back 60 Using the cycle approach makes the audit more MANAGEABLE. |
front 61 Why does the auditor divide the financial statements into segments around the financial statement cycles? | back 61 The approach aids in the ASSIGNMENT of tasks to different members of the audit team. |
front 62 The most important general ledger account included in and affecting several cycles is the | back 62 CASH account |
front 63 When using the cycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that | back 63 A) the transactions are related to financing a company rather than to its operations. B) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively. (Both A and B are correct) |
front 64 In describing the cycle approach to segmenting an audit, which of the following statements is not true? | back 64 The "INVENTORY and warehousing" cycle may be audited at any time during the engagement since it is unrelated to the other cycles. |
front 65 The cycle approach to auditing | back 65 TIES to the way transactions are recorded in journals and then summarized in the general ledger and financial statements. |
front 66 Which balance sheet accounts are included in the payroll and personnel cycle? | back 66 accrued payroll, cash in bank, and accrued payroll taxes |
front 67 Auditors generally use a financial statement cycle approach when performing a financial statement audit. Describe the transaction flow, using specific examples, from journals to financial statements that produce financial statements. | back 67 General ledger and subsidiary ledgers to General ledger trial balance to financial statements |
front 68 sales returns and allowances | back 68 sales and collection cycle |
front 69 capital stock | back 69 capital acquisition and repayment cycle |
front 70 buildings | back 70 acquisition and payment cycle |
front 71 notes payable | back 71 capital acquisition and repayment cycle |
front 72 salaries and commissions | back 72 payroll and personnel cycle |
front 73 cost of goods sold | back 73 inventory and warehousing cycle |
front 74 trade of accounts receivable | back 74 sales and collection cycle |
front 75 rent | back 75 acquisition and payment cycle |
front 76 Auditors have found that generally the most efficient and effective way to conduct audits is to | back 76 obtain some COMBINATION of assurance for each class of transactions and for the ending balance in the related accounts. |
front 77 The term audit objective refers to all of the following except for | back 77 CYCLE-RELATED audit objectives |
front 78 Which of the following is not one of the AICPA categories of assertions? | back 78 assertions about financial statements and correspondence to GAAP |
front 79 If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the | back 79 CLASSIFICATION assertion |
front 80 International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements? | back 80 assertions about the QUALITY of source documents used to prepare the financial statements |
front 81 Management assertions are | back 81 directly related to the financial reporting framework used by the company, usually U.S. GAAP or IFRS. |
front 82 Management makes the following assertions about account balances: | back 82 existence, completeness, VALUATION AND ALLOCATION, and rights and obligations. |
front 83 Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the ________ assertion. | back 83 accuracy and valuation |
front 84 Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"? | back 84 completeness |
front 85 Which of the following management assertions is not associated with classes of transactions and events? | back 85 rights and obligations |
front 86 With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the ________ have increased in importance. | back 86 presentation and disclosure |
front 87 Determining that the footnote disclosures related to long-term debt are accurate is an example of the ________ audit objective. | back 87 presentation and disclosure |
front 88 Briefly explain each management assertion related to classes of transactions and events for the period under audit. | back 88 • Occurrence • Completeness • Accuracy • Classification • Cutoff |
front 89 Briefly explain each management assertion related to account balances at period end. | back 89 • Existence. • Completeness. • Valuation and allocation. • Rights and obligations. |
front 90 Briefly explain each management assertion related to presentation and disclosure. | back 90 • Occurrence and rights and obligations. • Completeness. • Accuracy and valuation. • Classification and understandability. |
front 91 Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each class of transactions? | back 91 The GENERAL audit objectives are applicable to every class of transactions. |
front 92 The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She or he is gathering evidence about which transaction-related audit objective? | back 92 accuracy |
front 93 The posting and summarization audit objective are the auditor's counterpart to management's assertion of | back 93 accuracy |
front 94 ________ deals with potential overstatement and ________ deals with understatements (unrecorded transactions). | back 94 Occurrence; completeness |
front 95 Vouch recorded sales from the sales journal to the file of bills of lading. | back 95 occurrence; occurrence |
front 96 Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in recording sales transactions. | back 96 timing; cutoff |
front 97 Account for the sequence of prenumbered bills of lading and sales invoices. | back 97 completeness; completeness |
front 98 Trace from a sample of prelistings of cash receipts to the cash receipts journal, testing for names, amounts, and dates. | back 98 completeness/accuracy; completeness/accuracy |
front 99 Examine customer order forms for credit approval by the credit manager. | back 99 occurrence; occurrence |
front 100 Foot the purchases journal and trace the totals to the related general ledger accounts. | back 100 posting and summarization; accuracy |
front 101 Recompute the cash discounts taken by the client. | back 101 accuracy; accuracy |
front 102 Compare dates on cancelled checks with the bank cancellation date. | back 102 timing; cutoff |
front 103 Trace from a sample of cancelled checks to the cash disbursements journal. | back 103 completeness; completeness |
front 104 Examine supporting documentation for a sample of transactions for authorized payee and amount and to determine services or goods were received. | back 104 occurrence; occurrence |
front 105 In testing for cutoff, the objective is to determine | back 105 whether transactions are recorded in the CORRECT accounting period. |
front 106 The detail tie-in objective is not concerned that the details in the account balance | back 106 are properly disclosed in accordance with GAAP. |
front 107 The detail tie-in is part of the ________ assertion for account balances. | back 107 valuation and allocation |
front 108 The classification balance-related audit objective | back 108 involves determining if items included on a client's listing are included in the CORRECT general ledger accounts. |
front 109 Balance-related audit objectives | back 109 provide a FRAMEWORK to help the auditor accumulate sufficient appropriate evidence related to account balances. |
front 110 Which of the following statements is not true? | back 110 Balance-related audit objectives are applied to BOTH beginning and ending balances in balance sheet accounts. |
front 111 Obtain an aged listing of accounts receivable. For a sample of individual customers on the listing, agree the customer's name, amount, and other information with the corresponding information in the accounts receivable master file. | back 111 detail tie-in; valuation and allocation |
front 112 Examine details of sales for five days before and five days after year-end to determine whether sales have been recorded in the proper period. | back 112 cutoff; valuation and allocation |
front 113 Assess the reasonableness of the balance in the allowance for doubtful accounts. | back 113 realizable value; valuation and allocation |
front 114 Inquire as to whether any accounts receivable have been factored or sold during the period. | back 114 rights and obligations; rights and obligations |
front 115 Inquire as to whether there are any receivables from related parties. | back 115 classification; valuation and allocation |
front 116 The procedures used to test the effectiveness of the internal controls are known as | back 116 tests of controls |
front 117 Which of the following statements is not correct? | back 117 Gathering evidence and minimizing costs are EQUALLY important considerations that affect the approach the auditor selects. |
front 118 Two overriding considerations affect the many ways an auditor can accumulate evidence: 1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. 2. Cost of accumulating evidence should be minimized. In evaluating these considerations | back 118 the first is more important than the second. |
front 119 If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor | back 119 can significantly REDUCE other substantive tests. |
front 120 After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on | back 120 the auditor's PROFESSIONAL JUDGMENT. |
front 121 Direct, written communication with the client's customers to identify whether a receivable exists is an example of a(n) | back 121 test of DETAILS of balances. |
front 122 ________ are used as evidence to provide assurance about an account balance. | back 122 Substantive ANALYTICAL procedures |
front 123 List the four phases of a financial statement audit. | back 123 1. plan and design an audit approach based on risk assessment procedures 2. perform tests of controls and substantive tests of transactions 3. perform substantive analytical procedures and tests of details of balances 4. complete the audit and issue an audit report |
front 124 an intentional misstatement of the financial statements | back 124 fraud |
front 125 a set of six audit objectives the auditor must meet, including timing, posting and summarization, and accuracy | back 125 transaction-related audit objectives |
front 126 implied or expressed representations made by the client about classes of transactions, account balances and disclosures in the financial statements | back 126 management assertions |
front 127 audit procedures testing for monetary misstatements to determine whether the balance-related audit objectives have been satisfied for each significant account balance | back 127 tests of details of balances |
front 128 a set of nine audit objectives the auditor must meet, including completeness, detail tie-in, and rights and obligations | back 128 balance-related audit objectives |
front 129 audit procedures designed to test the effectiveness of control policies and procedures | back 129 tests of controls |
front 130 use of comparisons and relationships to assess whether account balances or other data appears reasonable | back 130 analytical procedures |