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Auditing and Assurance Services, 15e, Global Edition (Arens)

Chapter 6 Audit Responsibilities and Objectives


Learning Objective 6-1
1) The objective of an audit of the financial statements is an expression of an opinion on:
A) the fairness of the financial statements in all material respects
!) the accurac" of the financial statements
#) the accurac" of the annual report
$) the accurac" of the balance sheet and income statement
Ans%er: A
&) 'f the auditor believes that the financial statements are not fairl" stated or is unable to reach a
conclusion because of insufficient evidence( the auditor:
A) should %ithdra% from the engagement
!) should re)uest an increase in audit fees so that more resources can be used to conduct the
audit
#) has the responsibilit" of notif"ing financial statement users through the auditor*s report
$) should notif" regulators of the circumstances
Ans%er: #
+) Auditors accumulate evidence to:
A) defend themselves in the event of a la%suit
!) determine if the financial statements are correct
#) satisf" the re)uirements of the ,ecurities Acts of 1-++ and 1-+.
$) reach a conclusion about the fairness of the financial statements
Ans%er: $
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Learning Objective 6-&
1) The responsibilit" for adopting sound accounting policies and maintaining ade)uate internal
control rests %ith the:
A) board of directors
!) compan" management
#) financial statement auditor
$) compan"*s internal audit department
Ans%er: !
&) 'f management insists on financial statement disclosures that the auditor finds unacceptable(
the auditor can %ithdra% from the engagement or:
A)
'ssue an adverse audit report 'ssue a )ualified audit report
3es 3es
!)
'ssue an adverse audit report 'ssue a )ualified audit report
4o 4o
#)
'ssue an adverse audit report 'ssue a )ualified audit report
3es 4o
$)
'ssue an adverse audit report 'ssue a )ualified audit report
4o 3es
Ans%er: A
+) 'n certif"ing their annual financial statements( the #2O and #5O of a public compan" certif"
that the financial statements compl" %ith the re)uirements of:
A) 6AA1
!) the ,arbanes-Oxle" Act
#) the ,ecurities 2xchange Act of 1-+.
$) 6AA,
Ans%er: #
.) 7hich of the follo%ing statements is true of a public compan"*s financial statements8
A) ,arbanes-Oxle" re)uires the #2O onl" to certif" the financial statements
!) ,arbanes-Oxle" re)uires the #5O onl" to certif" the financial statements
#) ,arbanes-Oxle" re)uires the #2O and #5O to certif" the financial statements
$) ,arbanes-Oxle" re)uires neither the #2O nor the #5O to certif" the financial statements
Ans%er: #
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9) The responsibilit" for the preparation of the financial statements and the accompan"ing
footnotes belongs to:
A) the auditor
!) management
#) both management and the auditor e)uall"
$) management for the statements and the auditor for the notes
Ans%er: !
Learning Objective 6-+
1) The auditor*s best defense %hen material misstatements are not uncovered is to have
conducted the audit:
A) in accordance %ith generall" accepted auditing standards
!) as effectivel" as reasonabl" possible
#) in a timel" manner
$) onl" after an ade)uate investigation of the management team
Ans%er: A
&) An audit must be performed %ith an attitude of professional s:epticism 1rofessional
s:epticism consists of t%o primar" components: a )uestioning mind and:
A) the assumption that upper-level management is dishonest
!) a critical assessment of the audit evidence
#) the assumption that all emplo"ees are motivated b" greed
$) verification of all critical information b" independent third parties
Ans%er: !
+) 7hich of the follo%ing is not one of the reasons that auditors provide onl" reasonable
assurance on the financial statements8
A) The auditor commonl" examines a sample( rather than the entire population of transactions
!) Accounting presentations contain complex estimates %hich involve uncertaint"
#) 5raudulentl" prepared financial statements are often difficult to detect
$) Auditors believe that reasonable assurance is sufficient in the vast majorit" of cases
Ans%er: $
.) 7hich of the follo%ing statements is the most correct regarding errors and fraud8
A) An error is unintentional( %hereas fraud is intentional
!) 5rauds occur more often than errors in financial statements
#) 2rrors are al%a"s fraud and frauds are al%a"s errors
$) Auditors have more responsibilit" for finding fraud than errors
Ans%er: A
9) 7hen an auditor believes that an illegal act ma" have occurred( the auditor should first:
A) obtain an understanding of the nature and circumstances of the act
!) consult %ith legal counsel or others :no%ledgeable about the illegal act
#) discuss the matter %ith the audit committee
$) %ithdra% from the engagement
Ans%er: A
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6) The auditor has no responsibilit" to plan and perform the audit to obtain reasonable assurance
that misstatements( %hether caused b" errors or fraud( that are not ;;;;;;;; are detected
A) important to the financial statements
!) statisticall" significant to the financial statements
#) material to the financial statements
$) identified b" the client
Ans%er: #
<) 5raudulent financial reporting is most li:el" to be committed b" %hom8
A) Line emplo"ees of the compan"
!) Outside members of the compan"*s board of directors
#) #ompan" management
$) The compan"*s auditors
Ans%er: #
=) 7hich of the follo%ing %ould most li:el" be deemed a direct-effect illegal act8
A) >iolation of federal emplo"ment la%s
!) >iolation of federal environmental regulations
#) >iolation of federal income tax la%s
$) >iolation of civil rights la%s
Ans%er: #
-) The concept of reasonable assurance indicates that the auditor is:
A) not a guarantor of the correctness of the financial statements
!) not responsible for the fairness of the financial statements
#) responsible onl" for issuing an opinion on the financial statements
$) responsible for finding all misstatements
Ans%er: A
10) 7hich of the follo%ing is the auditor least li:el" to do %hen a%are of an illegal act8
A) $iscuss the matter %ith the client*s legal counsel
!) Obtain evidence about the potential effect of the illegal act on the financial statements
#) #ontact the local la% enforcement officials regarding potential criminal %rongdoing
$) #onsider the impact of the illegal act on the relationship %ith the compan"*s management
Ans%er: #
11) An auditor discovers that the compan"*s boo::eeper unintentionall" made an mista:e in
calculating the amount of the )uarterl" sales This is an example of:
A) emplo"ee fraud
!) an error
#) misappropriation of assets
$) a defalcation
Ans%er: !
1&) The auditor has considerable responsibilit" for notif"ing users as to %hether or not the
statements are properl" stated This imposes upon the auditor a dut" to:
A) provide reasonable assurance that material misstatements %ill be detected
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!) be a guarantor of the fairness in the statements
#) be e)uall" responsible %ith management for the preparation of the financial statements
$) be an insurer of the fairness in the statements
Ans%er: A
1+) ?The auditor should not assume that management is dishonest( but the possibilit" of
dishonest" must be considered? This is an example of:
A) unprofessional behavior
!) an attitude of professional s:epticism
#) due diligence
$) a rule in the A'#1A*s #ode of 1rofessional #onduct
Ans%er: !
1.) 'f the auditor %ere responsible for ma:ing certain that all of management*s assertions in the
financial statements %ere absolutel" correct:
A) ban:ruptcies could no longer occur
!) ban:ruptcies %ould be reduced to a ver" small number
#) audits %ould be much easier to complete
$) audits %ould not be economicall" practical
Ans%er: $
19) One of the characteristics of professional s:epticism is ;;;;;;;;( %hich is the conviction to
decide for oneself( rather than accepting the claims of others
A) interpersonal understanding
!) autonom"
#) suspension of judgment
$) self-esteem
Ans%er: !
16) 7hen dealing %ith la%s and regulations that do not have a direct effect on the financial
statements( the auditor:
A) should in)uire of management about %hether the entit" is in compliance %ith such la%s and
regulations
!) has no responsibilit" to determine if an" violations of these la%s has occurred
#) must report all violations( including inconse)uential violations( to the audit committee
$) should perform the same procedures as for violations having a direct effect on the financial
statements
Ans%er: A
1<) 7hich of the follo%ing statements is usuall" true8
A) @aterialit" is eas" to )uantif"
!) 5raudulent financial statements are often eas" for the auditor to detect( especiall" %hen there
is collusion among management
#) Aeasonable assurance is a lo% level of assurance that the financial statements are free from
material misstatement
$) An item is considered material if it %ould li:el" have changed or influenced the decisions of
a reasonable person using the statements
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Ans%er: $
1=) Auditing standards ma:e ;;;;;;;; distinctionBs) bet%een the auditor*s responsibilities for
searching for errors and fraud
A) little
!) a significant
#) no
$) various
Ans%er: #
1-) 'n comparing management fraud %ith emplo"ee fraud( the auditor*s ris: of failing to discover
the fraud is:
A) greater for management fraud because managers are inherentl" more deceptive than
emplo"ees
!) greater for management fraud because of management*s abilit" to override existing internal
controls
#) greater for emplo"ee fraud because of the higher crime rate among blue collar %or:ers
$) greater for emplo"ee fraud because of the larger number of emplo"ees in the organiCation
Ans%er: !
&0) @isappropriation of assets:
A) is generall" committed b" compan" management
!) harms the users of the financial statements b" providing them incorrect financial data for their
decision ma:ing
#) causes harm to stoc:holders because the assets are no longer available to their rightful
o%ners
$) causes the financial statements to be misstated since the misappropriation usuall" involves
material amounts
Ans%er: #
&1) 7hen comparing the auditor*s responsibilit" for detecting emplo"ee fraud and for detecting
errors( the profession has placed the responsibilit":
A) more on discovering errors than emplo"ee fraud
!) more on discovering emplo"ee fraud than errors
#) e)uall" on discovering errors and emplo"ee fraud
$) on the senior auditor for detecting errors and on the manager for detecting emplo"ee fraud
Ans%er: #
&&) 'f several emplo"ees collude to falsif" documents( the chance a normal audit %ould uncover
such acts is:
A) ver" lo%
!) ver" high
#) Cero
$) none of the above
Ans%er: A
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&+) 7hen planning the audit( if the auditor has no reason to believe that illegal acts exist( the
auditor should:
A) include audit procedures %hich have a strong probabilit" of detecting illegal acts
!) still include some audit procedures designed specificall" to uncover illegalities
#) ignore the issue
$) ma:e in)uiries of management regarding their policies for detecting and preventing illegal
acts and regarding their :no%ledge of violations( and then rel" on normal audit procedures to
detect errors( irregularities( and illegalities
Ans%er: $
&.) 7hen the auditor identifies or suspects noncompliance %ith la%s and regulations( the
auditor:
A) should discuss the matter %ith those %hom the" believe committed the illegal act
!) begin communication %ith the 5A,! in accordance %ith 1#AO! regulations
#) ma" disclaim an opinion on the basis of scope limitations if he is precluded b" management
from obtaining sufficient appropriate evidence
$) should %ithdra% from the engagement
Ans%er: #
&9) 7hen an auditor :no%s that an illegal act has occurred( she must:
A) report it to the proper governmental authorities
!) consider the effects on the financial statements( including the ade)uac" of disclosure
#) %ithdra% from the engagement
$) issue an adverse opinion
Ans%er: !
&6) 7hich of the follo%ing is an accurate statement concerning the auditor*s responsibilit" to
consider la%s and regulations8
A) Auditors can follo% an eas"( step-b"-step procedure to determine ho% la%s and regulations
impact the financial statements
!) The auditor*s responsibilit" %ill depend on %hether the la%s or regulations are expected to
have a direct impact on the financial statements
#) 't is the responsibilit" of the auditor to determine if an act constitutes noncompliance
$) The auditor must inform an outside part" if management has :no%ingl" not complied %ith a
la% or regulation
Ans%er: !
&<) 7hich of the follo%ing statements best describes the auditor*s responsibilit" regarding the
detection of fraud8
A) The auditor is responsible for the failure to detect fraud onl" %hen such failure clearl" results
from nonperformance of audit procedures specificall" described in the engagement letter
!) The auditor is re)uired to provide reasonable assurance that the financial statements are free
of both material errors and fraud
#) The auditor is responsible for detecting material financial statement fraud( but not a material
misappropriation of assets
$) The auditor is responsible for the failure to detect fraud onl" %hen an un)ualified opinion is
issued
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Ans%er: !
&=) 'f a client has violated federal tax la%s:
A) the auditor must notif" the 'A,
!) and the amount is significant( the auditor should communicate %ith those charged %ith
governance
#) the noncompliance generall" %ill not impact the financial statements
$) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the
audit
Ans%er: !
&-) $iscuss the differences bet%een errors( frauds( and illegal acts 6ive an example of each
Ans%er: The primar" difference bet%een errors and frauds is that errors are unintentional
misstatements of the financial statements( %hereas frauds are intentional misstatements 'llegal
acts are violations of la%s or government regulations( other than frauds An example of an error
is a mathematical mista:e %hen footing the columns in the sales journal An example of a fraud
is the creation of fictitious accounts receivable An example of an illegal act is the dumping of
toxic %aste in violation of the federal environmental protection la%s
+0) $iscuss the actions an auditor should ta:e %hen an illegal act is identified or suspected
Ans%er: 7hen an auditor discovers or suspects noncompliance %ith a la% or regulation Billegal
act)( unless the matters involved are inconse)uential( the auditor should:
1 #onsider the effects of the illegal act on the financial statements( including the ade)uac" of
disclosures 'f the auditor concludes that disclosures are inade)uate( the auditor should express a
)ualified or adverse opinion on the financial statements 'f the auditor is precluded b"
management or those charged %ith governance from obtaining sufficient appropriate evidence to
evaluate %hether noncompliance that ma" be material to the financial statements has occurred or
is li:el" to have occurred( the auditor should express a )ualified opinion or disclaim an opinion
on the financial statements on the basis of the scope limitation
& #ommunicate %ith those charged %ith governance matters involving noncompliance %ith
la%s and regulations that came to the auditor*s attention during the course of the audit 'f the
matter is believed to be intentional and material( it should be communicated to those charged
%ith governance( such as the board of directors( as soon as practicable
+ 'dentif" %hether a responsibilit" exists to report the identified or suspected noncompliance to
parties outside the entit"( such as regulator" authorities
. 2valuate the effects of the noncompliance on other aspects of the audit( including the
auditor*s ris: assessment and the reliabilit" of other representations from management
+1) $iscuss three reasons %h" auditors are responsible for ?reasonable? but not ?absolute?
assurance
Ans%er:
D @ost audit evidence results from testing a sample of a population ,ampling involves some
ris: of not uncovering material misstatements
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D Accounting presentations contain complex estimates( %hich inherentl" involve uncertaint"
and can be affected b" future events As a result( the auditor has to rel" on evidence that is
persuasive but not convincing
D 5raudulentl" prepared financial statements are often ver" difficult for the auditor to detect(
especiall" %hen there is collusion among management
+&) The concept of professional s:epticism has been a foundational element of auditing
standards for "ear and continues to be difficult to implement in practice Aecent academic
research on the topic of professional s:epticism suggests that there are six characteristics to
s:epticism List and briefl" describe each of these characteristics
Ans%er: The six characteristics of s:epticism are:
1 Euestioning mindset - a disposition to in)uir" %ith some sense of doubt
& ,uspension of judgment - %ithholding judgment until appropriate evidence is obtained
+ ,earch for :no%ledge - a desire to investigate be"ond the obvious( %ith a desire to
corroborate
. 'nterpersonal understanding - recognition that people*s motivations and perceptions can lead
them to provide biased or misleading information
9 Autonom" - the self-direction( moral independence( and conviction to decide for oneself(
rather than accepting the claims of others
6 ,elf-esteem - the self-confidence to resist persuasion and to challenge assumptions or
conclusions
Learning Objective 6-.
1) 7h" does the auditor divide the financial statements into smaller segments8
A) Fsing the c"cle approach ma:es the audit more manageable
!) @ost accounts have fe% relationships %ith others and so it is more efficient to brea: the
financial statements into smaller pieces
#) The c"cle approach is used because auditing standards re)uire it
$) All of the above are correct
Ans%er: A
&) 7h" does the auditor divide the financial statements into segments around the financial
statement c"cles8
A) @ost auditors are trained to audit c"cles as opposed to entire financial statements
!) The approach aids in the assignment of tas:s to different members of the audit team
#) The c"cle approach is re)uired b" auditing standards
$) The c"cle approach allo%s the auditor to detect illegal acts
Ans%er: !
+) The most important general ledger account included in and affecting several c"cles is the:
A) cash account
!) inventor" account
#) income tax expense and liabilit" accounts
$) retained earnings account
Ans%er: A
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.) 7hen using the c"cle approach to segmenting the audit( the reason for treating capital
ac)uisition and repa"ment separatel" from the ac)uisition of goods and services is that:
A) the transactions are related to financing a compan" rather than to its operations
!) most capital ac)uisition and repa"ment c"cle accounts involve fe% transactions( but each is
often highl" material and therefore should be audited extensivel"
#) both A and ! are correct
$) neither A nor ! is correct
Ans%er: #
9) The c"cle approach to auditing:
A) ties to the %a" transactions are recorded in journals and then summariCed in the general
ledger and financial statements
!) cannot combine transactions recorded in different journals %ith the general ledger balances
that result from those transactions
#) is the onl" %a" of segmenting an audit
$) assumes that each account has t%o or more c"cles associated %ith it
Ans%er: A
6) Auditors generall" use a financial statement c"cle approach %hen performing a financial
statement audit $escribe the transaction flo%( using specific examples( from journals to
financial statements that produce financial statements
Ans%er:
TransactionsGsales( cash receipts( ac)uisition of goodsHservices( cash disbursements( pa"roll
services and disbursements( and allocation and adjustments
IournalsGsales( cash receipts( ac)uisitions( cash disbursements( pa"roll( and general
6eneral ledger and subsidiar" ledgers to 6eneral ledger trial balance to financial statements
Learning Objective 6-9
1) Auditors have found that generall" the most efficient and effective %a" to conduct audits is to:
A) obtain complete assurance about the correctness of each class of transactions affecting the
account
!) obtain some combination of assurance for each class of transactions and for the ending
balance in the related accounts
#) obtain assurance about the ending balance of the account onl"
$) verif" each entr" that %as made into an account
Ans%er: !
&) The term audit objective refers to all of the follo%ing except for:
A) transaction-related audit objectives
!) presentation and disclosure-related audit objectives
#) balance-related audit objectives
$) c"cle-related audit objectives
Ans%er: $
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Learning Objective 6-6
1) 7hich of the follo%ing is not one of the three categories of assertions8
A) Assertions about classes of transactions and events for the period under audit
!) Assertions about financial statements and correspondence to 6AA1
#) Assertions about account balances at period end
$) Assertions about presentation and disclosure
Ans%er: !
&) 'f a short-term note pa"able is included in the accounts pa"able balance on the financial
statement( there is a violation of the:
A) completeness assertion
!) existence assertion
#) cutoff assertion
$) classification assertion
Ans%er: $
+) 'nternational auditing standards and F, 6AA1 classif" assertions into three categories
7hich of the follo%ing is not a categor" of assertions that management ma:es about the
accounting information in financial statements8
A) Assertions about classes of transactions for the period under audit
!) Assertions about account balances at period end
#) Assertions about the )ualit" of source documents used to prepare the financial statements
$) Assertions about presentation and disclosure
Ans%er: #
.) @anagement assertions are:
A) directl" related to the financial reporting frame%or: used b" the compan"( usuall" F,
6AA1 or '5A,
!) stated in the footnotes to the financial statements
#) explicitl" expressed representations about the financial statements
$) provided to the auditor in the assertions letter( but are not disclosed on the financial
statements
Ans%er: A
9) @anagement ma:es the follo%ing assertions about account balances:
A) existence( completeness( classification and cutoff
!) existence( accurac"( classification and rights and obligations
#) existence( completeness( valuation and allocation( and rights and obligations
$) existence( completeness( rights and obligations( and cutoff
Ans%er: #
6) 7hich of the follo%ing statements is true about the completeness and occurrence assertions8
A) !oth assertions are relevant to classes of transactions and events and account balances
!) 'f management asserts that recorded sales transactions represent exchanges of goods or
services that actuall" too: place( the" are asserting to completeness
#) >iolations of the occurrence assertion relate to account overstatements
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$) The failure to record a sale that did occur is a violation of the occurrence assertion
Ans%er: #
<) 7hich of the follo%ing assertions is described as ?this assertion addresses %hether all
transactions that should be included in the financial statements are in fact included?8
A) Occurrence
!) #ompleteness
#) Aights and obligations
$) 2xistence
Ans%er: !
=) 7hich of the follo%ing management assertions is not associated %ith classes of transactions
and events8
A) Occurrence
!) #lassification
#) Accurac"
$) Aights and obligations
Ans%er: $
Learning Objective 6-<
1) 7hich of the follo%ing statements is true regarding the distinction bet%een general audit
objectives and specific audit objectives for each class of transactions8
A) The specific audit objectives are applicable to ever" class of transactions
!) The general audit objectives are applicable to ever" class of transactions
#) Once the specific transaction-related audit objectives are established( the" can be used to
develop the general transaction-related objectives
$) 5or an" given class of transactions( usuall" onl" one audit objective must be met to conclude
the transactions are properl" recorded
Ans%er: !
&) The auditor is determining that the the correct selling price %as used for billing and that the
)uantit" of goods shipped %as the same as the )uantit" billed ,he is gathering evidence about
%hich transaction related audit objective8
A) 2xistence
!) #ompleteness
#) Accurac"
$) #ut-off
Ans%er: #
+) The posting and summariCation audit objective is the auditor*s counterpart to management*s
assertion of:
A) occurrence
!) completeness
#) accurac"
$) classification
Ans%er: #
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.) After the general transaction related-audit objectives are understood( specific transaction-
related audit objectives for each material class of transactions can be developed 7hich of the
follo%ing statements is true8
A) There should be at least one specific objective for each relevant general objective
!) There %ill be onl" one specific objective for each relevant general objective
#) There %ill be man" specific objectives developed for each relevant general objective
$) There must be one specific objective for each general objective
Ans%er: A
9) 'n the context of the audit of sales( distinguish bet%een the occurrence and completeness
transaction-related audit objectives ,tate the effect on the sales account Boverstatement or
understatement) of a violation of each objective
Ans%er: 7hen testing the occurrence objective for sales( the auditor*s focus is on %hether the
sales that have been recorded in the sales journal actuall" occurred 'n contrast( tests of the
completeness objective are concerned %ith determining %hether all sales that actuall" occurred
have been recorded in the sales journal >iolations of the occurrence objective result in
overstatements of salesJ violations of the completeness objective result in understatements of
sales
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6) !elo% are five audit procedures( all of %hich are tests of transactions associated %ith the audit
of the sales and collection c"cle Also belo% are the six general transaction-related audit
objectives and the five management assertions 5or each audit procedure( indicate B1) its audit
objective( and B&) the management assertion being tested
Audit Objectives
A Occurrence
! #ompleteness
# Accurac"
$ 1osting and summariCation
2 #lassification
5 Timing
Assertions
> Occurrence
7 #ompleteness
K Accurac"
3 #lassification
L #utoff
1 >ouch recorded sales from the sales journal to the file of bills of lading
B1) ;;;;;;;;
B&) ;;;;;;;;
& #ompare dates on the bill of lading( sales invoices( and sales journal to test for dela"s in
recording sales transactions
B1) ;;;;;;;;
B&) ;;;;;;;;
+ Account for the se)uence of prenumbered bills of lading and sales invoices
B1) ;;;;;;;;
B&) ;;;;;;;;
. Trace from a sample of prelistings of cash receipts to the cash receipts journal( testing for
names( amounts( and dates
B1) ;;;;;;;;
B&) ;;;;;;;;
9 2xamine customer order forms for credit approval b" the credit manager
B1) ;;;;;;;;
B&) ;;;;;;;;
Ans%er:
1 B1) A B&) >
& B1) 5 B&) L
+ B1) ! B&) 7
. B1) !( # B&) 7( K
9 B1) A B&) >
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<) !elo% are five audit procedures( all of %hich are tests of transactions associated %ith the audit
of the ac)uisition and pa"ment c"cle Also belo% are the six general transaction-related audit
objectives and the five management assertions 5or each audit procedure( indicate B1) its audit
objective( and B&) the management assertion being tested
Audit Objectives
A Occurrence
! #ompleteness
# Accurac"
$ 1osting and summariCation
2 #lassification
5 Timing
Assertions
> Occurrence
7 #ompleteness
K Accurac"
3 #lassification
L #utoff
1 5oot the purchases journal and trace the totals to the related general ledger accounts
B1) ;;;;;;;;
B&) ;;;;;;;;
& Aecompute the cash discounts ta:en b" the client
B1) ;;;;;;;;
B&) ;;;;;;;;
+ #ompare dates on cancelled chec:s %ith the ban: cancellation date
B1) ;;;;;;;;
B&) ;;;;;;;;
. Trace from a sample of cancelled chec:s to the cash disbursements journal
B1) ;;;;;;;;
B&) ;;;;;;;;
9 2xamine supporting documentation for a sample of transactions for authoriCed pa"ee and
amount and to determine services or goods %ere received
B1) ;;;;;;;;
B&) ;;;;;;;;
Ans%er:
1 B1) $ B&) K
& B1) # B&) K
+ B1) 5 B&) L
. B1) ! B&) 7
9 B1) A B&) >
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Learning Objective 6-=
1) 'n testing for cutoff( the objective is to determine:
A) %hether all of the current period*s transactions are recorded
!) %hether transactions are recorded in the correct accounting period
#) the proper cutoff bet%een capitaliCing and expensing expenditures
$) the proper cutoff bet%een disclosing items in footnotes or in account balances
Ans%er: !
&) The detail tie-in objective is not concerned that the details in the account balance:
A) agree %ith related subsidiar" ledger amounts
!) are properl" disclosed in accordance %ith 6AA1
#) foot to the total in the account balance
$) agree %ith the total in the general ledger
Ans%er: !
+) The detail tie-in is part of the ;;;;;;;; assertion for account balances
A) classification
!) valuation and allocation
#) rights and obligations
$) completeness
Ans%er: !
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.) The classification balance-related audit objective:
A) involves determining if items included on a client*s listing are included in the correct general
leger accounts
!) is the counterpart to the management assertion of completeness
#) involves determining if items included on a client*s listing are disclosed properl" in the
financial statements
$) involves t"ing in the account balances to the general ledger
Ans%er: A
9) 7hich of the follo%ing best describes tests of details of balances8
A) Audit procedures designed to test for monetar" misstatements in the accounts summariCed in
the financial statements
!) Audit procedures designed to test for the monetar" amounts of transactions
#) Audit procedures designed to test for reasonableness of account balances
$) Audit procedures designed to test for effectiveness in recording accounting information
Ans%er: A
6) 7hich of the follo%ing statements is not true8
A) !alance-related audit objectives are applied to ending account balances
!) Transaction-related audit objectives are applied to classes of transactions
#) !alance-related audit objectives are applied to the ending balance in balance sheet accounts
$) !alance-related audit objectives are applied to both beginning and ending balances in balance
sheet accounts
Ans%er: $
<) An important balance related audit objective is realiCable value $escribe the purpose of this
audit objective( %hat it is concerned %ith( and give an example
Ans%er:
1urposeGto ma:e sure that assets are included on the balance sheet at the amounts estimated to
be realiCed
#onceptG%hether an account balance has been reduced for declines from historical cost or %hen
accounting standards re)uire a fair value accounting treatment for the account 't is concerned
%ith valuation and allocation
2xampleGallo%ance for uncollectible accounts( %rite-do%ns of inventor"
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=) !elo% are five audit procedures( all of %hich are tests of balances associated %ith the audit of
accounts receivable Also belo% are the eight general balance-related audit objectives and the
four management assertions 5or each audit procedure( indicate B1) its audit objective( and B&) the
management assertion being tested
Audit Objectives
A 2xistence
! #ompleteness
# Accurac"
$ #lassification
2 #utoff
5 $etail tie-in
6 AealiCable value
M Aights and obligations
Assertions
> 2xistence
7 #ompleteness
K >aluation and allocation
3 Aights and obligations
1 Obtain an aged listing of accounts receivable 5or a sample of individual customers on the
listing( agree the customer*s name( amount( and other information %ith the corresponding
information in the accounts receivable master file
B1) ;;;;;;;;
B&) ;;;;;;;;
& 2xamine details of sales for five da"s before and five da"s after "ear-end to determine %hether
sales have been recorded in the proper period
B1) ;;;;;;;;
B&) ;;;;;;;;
+ Assess the reasonableness of the balance in the allo%ance for doubtful accounts
B1) ;;;;;;;;
B&) ;;;;;;;;
. 'n)uire as to %hether an" accounts receivable have been factored or sold during the period
B1) ;;;;;;;;
B&) ;;;;;;;;
9 'n)uire as to %hether there are an" receivables from related parties
B1) ;;;;;;;;
B&) ;;;;;;;;
Ans%er:
1 B1) 5 B&) K
& B1) 2 B&) K
+ B1) 6 B&) K
. B1) M B&) 3
9 B1) $ B&) K
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Learning Objective 6--
1) $etermining that the footnote disclosures related to long-term debt are accurate is an example
of the ;;;;;;;; audit objective
A) occurrence
!) completeness
#) presentation and disclosure
$) classification and understandabilit"
Ans%er: #
Learning Objective 6-10
1) Tests of details of balances are specific audit procedures that are intended to:
A) test for monetar" misstatements in the financial statements
!) prove that the accounts %ith material balances are classified correctl"
#) prove that the trial balance is in balance
$) identif" the details of the internal control s"stem
Ans%er: A
&) 7hich of the follo%ing statements is not correct8
A) There are man" %a"s an auditor can accumulate evidence to meet overall audit objectives
!) ,ufficient appropriate evidence must be accumulated to meet the auditor*s professional
responsibilit"
#) 't is appropriate to minimiCe the cost of accumulating evidence
$) 6athering evidence and minimiCing costs are e)uall" important considerations that affect the
approach the auditor selects
Ans%er: $
+) T%o overriding considerations affect the man" %a"s an auditor can accumulate evidence:
1 ,ufficient appropriate evidence must be accumulated to meet the auditor*s professional
responsibilit"
& #ost of accumulating evidence should be minimiCed
'n evaluating these considerations:
A) the first is more important than the second
!) the second is more important than the first
#) the" are e)uall" important
$) it is impossible to prioritiCe them
Ans%er: A
.) 'f the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding internal control( assessing control ris:( testing
controls( and anal"tical procedures( then the auditor:
A) can issue an un)ualified opinion
!) can significantl" reduce other substantive tests
#) can %rite the engagement letter
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$) needs to perform additional tests of controls so that the assurance level can be increased
Ans%er: !
9) After the auditor has completed all audit procedures( it is necessar" to combine the
information obtained to reach an overall conclusion as to %hether the financial statements are
fairl" presented This is a highl" subjective process that relies heavil" on:
A) generall" accepted auditing standards
!) the A'#1A*s #ode of 1rofessional #onduct
#) generall" accepted accounting principles
$) the auditor*s professional judgment
Ans%er: $
6) List the four phases of a 5inancial ,tatement Audit
Ans%er: 1 1lan and design an audit approach based on ris: assessment procedures
& 1erform tests of controls and substantive tests of transactions
+ 1erform anal"tical procedures and tests of details of balances
. #omplete the audit and issue an audit report
Terms: 1hases of financial statement audit
<) $escribe %hat anal"tical procedures and tests of details of balances are and give an example
of each
Ans%er: Anal"tical procedures consist of evaluations of financial information through anal"sis
of plausible relationships among financial and nonfinancial data Anal"tical procedures use
comparisons and relationships to assess %hether account balances and other data appear
reasonable An example of an anal"tical procedure is to examine sales transactions in the sales
journal for unusuall" large amounts andHor compare monthl" sales %ith prior "ears
Tests of details of balances are specific procedures intended to test for monetar" misstatements
in balances in the financial statements An example is direct %ritten communication %ith the
client*s customers to identif" an" incorrect amounts
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=) @atch seven of the terms Ba-:) %ith the definitions provided belo% B1-<):
a Tests of details of balances
b Tests of controls
c ,ubstantive tests of transactions
d Anal"tical procedures
e Transaction-related audit objectives
f @anagement assertions
g !alance-related audit objectives
h 5raud
i 'llegal act
j 2rror
: @anagement fraud
;;;;;;;; 1 An intentional misstatement of the financial statements
;;;;;;;; & A set of six audit objectives the auditor must meet( including timing( posting and
summariCation( and accurac"
;;;;;;;; + 'mplied or expressed representations made b" the client about classes of
transactions( account balances and disclosures in the financial statements
;;;;;;;; . Audit procedures testing for monetar" misstatements to determine %hether the
balance-related audit objectives have been satisfied for each significant account balance
;;;;;;;; 9 A set of nine audit objectives the auditor must meet( including completeness( detail
tie-in( and rights and obligations
;;;;;;;; 6 Audit procedures designed to test the effectiveness of control policies and
procedures
;;;;;;;; < Fse of comparisons and relationships to assess %hether account balances or other
data appears reasonable
Ans%er:
1 h
& e
+ f
. a
9 g
6 b
< d
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