AUDITING AND ASSURANCE SERVICES AN INTEGRATED APPROACH 16TH EDITION – TEST BANK

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AUDITING AND ASSURANCE SERVICES AN INTEGRATED APPROACH 16TH EDITION – TEST BANK

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 2   The CPA Profession

 

2.1   Learning Objective 2-1

 

1) The legal right to perform audits is granted to a CPA firm by regulation of

  1. A) each state.
  2. B) the Financial Accounting Standards Board (FASB).
  3. C) the American Institute of Certified Public Accountants (AICPA).
  4. D) the Auditing Standards Board.

Answer:  A

Terms:  Legal rights to perform audits

Diff:  Moderate

Objective:  LO 2-1

AACSB:  Reflective thinking

 

2) Which of the following is not a characteristic of a small firm?

  1. A) Most small firms have fewer than 25 professionals.
  2. B) Small firms perform audits on small and not-for-profit businesses.
  3. C) Tax services are more important than auditing services to the small firm.
  4. D) Small firms are prohibited by the SEC from auditing publicly traded companies.

Answer:  D

Terms:  Characteristics of a small firm

Diff:  Moderate

Objective:  LO 2-1

AACSB:  Reflective thinking

 

3) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients. Which of the following is true for auditors of publicly traded companies?

  1. They are restricted from providing consulting services to privately held companies.
  2. There is no restriction on providing consulting services to non-audit clients.
  3. A) I only
  4. B) II only
  5. C) I and II
  6. D) Neither I nor II

Answer:  B

Terms:  Sarbanes-Oxley and Securities Exchange Commission restrictions

Diff:  Moderate

Objective:  LO 2-1

AACSB:  Reflective thinking

Topic:  SOX

 

 

4) Which of the following does not describe a size category for a CPA firm?

  1. A) Big Four national firms
  2. B) Big Four international firms
  3. C) local firms
  4. D) national and regional firms

Answer:  A

Terms:  Three categories for describing size of audit firms

Diff:  Easy

Objective:  LO 2-1

AACSB:  Reflective thinking

5) ________ is one of the Big Four international CPA firms.

  1. A) Deloitte
  2. B) KPMG
  3. C) Ernst & Young
  4. D) All of the above are classified as Big Four international CPA firms.

Answer:  D

Terms:  Three categories for describing size of audit firms

Diff:  Moderate

Objective:  LO 2-1

AACSB:  Reflective thinking

 

6) In which type of service does the CPA assemble the financial statements but provide no assurance to third parties?

  1. A) audit
  2. B) compilation
  3. C) review
  4. D) bookkeeping

Answer:  B

Terms:  Compilation

Diff:  Moderate

Objective:  LO 2-1

AACSB:  Reflective thinking

 

7) In addition to attestation and assurance services, CPA firms provide other services to their clients. List three of these services.

Answer:  Other services performed by a CPA firm include:

  • accounting and bookkeeping services
  • tax services
  • management consulting and risk advisory services.

Terms:  Activities of CPA firms

Diff:  Moderate

Objective:  LO 2-1

AACSB:  Reflective thinking

 

 

8) Many small, local accounting firms perform audits as their primary service to their clients.

Answer:  FALSE

Terms:  Small accounting firms do not perform audits

Diff:  Easy

Objective:  LO 2-1

AACSB:  Reflective thinking

 

9) Sarbanes-Oxley and the Securities and Exchange Commission restrict auditors from providing many consulting services to their publicly traded audit clients.

Answer:  TRUE

Terms:  Sarbanes-Oxley and Securities Exchange Commission restrictions

Diff:  Easy

Objective:  LO 2-1

AACSB:  Reflective thinking

Topic:  SOX

2.2   Learning Objective 2-2

 

1) Which of the following statements is true as it relates to limited liability partnerships?

  1. A) Only senior partners are liable for the partnerships debts.
  2. B) Partners have no liability in a limited liability partnership arrangement.
  3. C) Partners are personally liable for the acts of those under their supervision.
  4. D) All partners must be AICPA members.

Answer:  C

Terms:  Limited liability partnerships

Diff:  Challenging

Objective:  LO 2-2

AACSB:  Reflective thinking

 

2) Which staff level in a CPA firm performs most of the detailed audit work?

  1. A) partner
  2. B) staff assistant
  3. C) senior auditor
  4. D) senior manager

Answer:  B

Terms:  Staff levels in CPA firm

Diff:  Easy

Objective:  LO 2-2

AACSB:  Reflective thinking

 

 

3) List and describe the three factors that influence the organizational structure of all CPA firms. What are the most common forms of CPA firm organization?

Answer:  The three factors that influence the organization of a CPA firm include:

  1. The need for independence from clients. Independence permits auditors to remain unbiased in drawing conclusions about the financial statements.
  2. The importance of a structure to encourage competence. Competency permits auditors to conduct audits and perform other services effectively and efficiently.
  3. The increased litigation risk faced by auditors. Audit firms continue to experience increases in litigation-related costs. Some organizational structures afford a degree of protection to individual firm members.

 

Common forms of audit firm organization include:

 

  • Proprietorship
  • General Partnership
  • General Corporation
  • Professional Corporation
  • Limited Liability Company
  • Limited Liability Partnership

Terms:  Factors that influence the organizational structure of CPA firms

Diff:  Moderate

Objective:  LO 2-2

AACSB:  Reflective thinking

4) List and describe the six organizational structures available to CPA firms.

Answer:  CPA firms can take one of six organizational forms:

  • Proprietorship. This form is limited to firms with only one owner.
  • General partnership. This form is similar to a proprietorship, except that it applies to multiple owners.
  • General corporation. Shareholders in a general corporation are liable only to the extent of their investment in the corporation. Many states prohibit CPA firms from organizing as a general corporation.
  • Professional corporation. A professional corporation provides professional services and is owned by one or more shareholders. Personal liability protection for shareholders in professional corporations varies widely from state to state.
  • Limited liability company. This form combines the most favorable attributes of a general corporation and a general partnership. LLCs are typically structured and taxed like a general partnership, but its owners have limited personal liability similar to that of a general corporation.
  • Limited liability partnership. An LLP is owned by one or more partners. It is structured and taxed like a general partnership. However, the personal liability protection of an LLP is less than that of a general corporation or an LLC, but it is greater than a general partnership. Many accounting firms now operate as LLPs.

Terms:  Organizational structures available to CPA firms

Diff:  Moderate

Objective:  LO 2-2

AACSB:  Reflective thinking

 

5) All of the Big Four accounting firms and many of the smaller CPA firms now operate as limited liability partnerships.

Answer:  TRUE

Terms:  Limited liability partnerships

Diff:  Easy

Objective:  LO 2-2

AACSB:  Reflective thinking

 

6) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to that of a general corporation.

Answer:  TRUE

Terms:  Limited liability companies

Diff:  Moderate

Objective:  LO 2-2

AACSB:  Reflective thinking

 

7) In a CPA firm, the audit partner coordinates the performance of audit procedures.

Answer:  FALSE

Terms:  Staff levels in CPA firm

Diff:  Easy

Objective:  LO 2-2

AACSB:  Reflective thinking

2.3   Learning Objective 2-3

 

1) The organization that is responsible for providing oversight for auditors of public companies is called the

  1. A) Auditing Standards Board.
  2. B) American Institute of Certified Public Accountants.
  3. C) Public Oversight Board.
  4. D) Public Company Accounting Oversight Board.

Answer:  D

Terms:  Organization responsible for providing oversight for auditors of public companies

Diff:  Easy

Objective:  LO 2-3

AACSB:  Reflective thinking

Topic:  SOX

 

 

2) Members of the Public Company Accounting Oversight Board are appointed and overseen by the

  1. A) U.S. Congress.
  2. B) American Institute of Certified Public Accountants.
  3. C) Auditing Standards Board.
  4. D) Securities and Exchange Commission.

Answer:  D

Terms:  Members of Public Company Accounting Oversight Board

Diff:  Easy

Objective:  LO 2-3

AACSB:  Reflective thinking

Topic:  SOX

 

3) The Public Company Accounting Oversight Board

  1. A) performs inspections of the quality controls of firms that audit public companies.
  2. B) establishes auditing standards that must be followed by CPAs on all audits.
  3. C) oversees auditors of private companies.
  4. D) performs all of the above functions.

Answer:  A

Terms:  Public Company Accounting Oversight Board

Diff:  Moderate

Objective:  LO 2-3

AACSB:  Reflective thinking

Topic:  SOX

 

4) Assume the Public Company Accounting Oversight Board (PCAOB) identifies a violation during its inspection of a registered accounting firm. The PCAOB

  1. A)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
Yes Yes Yes

 

  1. B)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
Yes Yes No

 

  1. C)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
Yes No No

 

  1. D)
can enforce disciplinary action against the accounting firm report the matter to the Securities and Exchange Commission suspend the license to practice of the CPA guilty of the violation
No No No

 

Answer:  B

Terms:  Public Company Accounting Oversight Board inspection violations

Diff:  Moderate

Objective:  LO 2-3

AACSB:  Reflective thinking

Topic:  SOX

 

 

5) The Sarbanes-Oxley Act established the Public Company Accounting Oversight Board (PCAOB). What are the PCAOB’s primary functions?

Answer:  The PCAOB provides oversight for auditors of public companies; establishes auditing, attestation, and quality control standards for public company audits; and performs inspections of audit engagements as well as the quality controls at audit firms performing those audits.

Terms:  Sarbanes-Oxley Act; Public Company Accounting Oversight Board primary functions

Diff:  Moderate

Objective:  LO 2-3

AACSB:  Reflective thinking

Topic:  SOX

 

6) The Public Company Accounting Oversight Board (PCAOB) provides oversight to auditors of publicly traded and private companies.

Answer:  FALSE

Terms:  Public Company Accounting Oversight Board

Diff:  Easy

Objective:  LO 2-3

AACSB:  Reflective thinking

7) The PCAOB requires annual inspections of accounting firms that audit more than ten public companies.

Answer:  FALSE

Terms:  Payroll expense accounts; tests of details of balances

Diff:  Moderate

Objective:  LO 2-3

AACSB:  Reflective thinking

Topic:  SOX

 

2.4   Learning Objective 2-4

 

1) The form that must be completed and filed with the Securities and Exchange Commission whenever a company experiences a significant event that is of interest to public investors is the

  1. A) Form S-1.
  2. B) Form 8-K.
  3. C) Form 10-K.
  4. D) Form 10-Q.

Answer:  B

Terms:  Sec form 8-k, reporting significant events

Diff:  Moderate

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

 

 

2) The form that must be filed with the Securities and Exchange Commission whenever a company plans to issue new securities to the public is the

  1. A) Form S-1.
  2. B) Form 8-K.
  3. C) Form 10-K.
  4. D) Form 10-Q.

Answer:  A

Terms:  Form must be completed and filed with Securities and Exchange Commission when company plans to issue new securities

Diff:  Moderate

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

 

3) Which of the following is a correct statement regarding the SEC?

  1. A) The Securities Act of 1934 requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.
  2. B) All public companies must file monthly statements with the SEC.
  3. C) The Form 10-K must be filed within 30 days after the close of the fiscal year.
  4. D) The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission.

Answer:  D

Terms:  Securities and Exchange Commission

Diff:  Challenging

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

4) With respect to the SEC,

  1. A) the attitude of the SEC is generally considered in any major change proposed by the FASB.
  2. B) the SEC is the sole agency responsible for setting generally accepted accounting principles.
  3. C) the SEC requirements of greatest interest to CPAs are set forth in the their enforcement regulations.
  4. D) the SEC has the power to establish rules for all CPAs.

Answer:  A

Terms:  Securities and Exchange Commission influence on setting generally accepted accounting principles

Diff:  Moderate

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

 

 

5) Discuss the purpose of the Securities and Exchange Commission and its influence on setting generally accepted accounting principles.

Answer:  The SEC, an agency of the federal government, assists in providing investors with reliable information upon which to make investment decisions. The SEC has considerable influence in setting generally accepted accounting principles (GAAP) and disclosure requirements for financial statements as a result of its authority for specifying reporting requirements considered necessary for fair disclosure to investors. The SEC has the power to establish rules for any CPA associated with audited financial statements submitted to the commission. The attitude of the SEC is generally considered in any major change proposed by the Financial Accounting Standards Board (FASB), the independent organization that establishes U.S. GAAP.

Terms:  Securities and Exchange Commission influence on setting generally accepted accounting principles

Diff:  Moderate

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

 

6) The difference between the Securities Act of 1933 and the Securities Act of 1934 is that only the 1934 act requires audited financial statements.

Answer:  FALSE

Terms:  Securities Acts of 1933 and 1934

Diff:  Easy

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

 

7) Form 10-K must be filed with the SEC whenever a public company experiences a significant event.

Answer:  FALSE

Terms:  Form 10-K; SEC

Diff:  Moderate

Objective:  LO 2-4

AACSB:  Reflective thinking

Topic:  Public

8) The overall purpose of the Securities and Exchange Commission is to assist in providing investors with reliable information upon which to make investment decisions.

Answer:  TRUE

Terms:  Securities and Exchange Commission

Diff:  Moderate

Objective:  LO 2-4

AACSB:  Reflective thinking

 

 

2.5   Learning Objective 2-5

 

1) Statements on Standards for Accounting and Review Services (SSARS) are issued by the

  1. A) Accounting and Review Services Committee.
  2. B) Professional Ethics Executive Committee.
  3. C) Securities and Exchange Commission.
  4. D) Financial Accounting Standards Board.

Answer:  A

Terms:  Statements on Standards for Accounting and Review Services (SSARS)

Diff:  Moderate

Objective:  LO 2-5

AACSB:  Reflective thinking

 

2) The American Institute of Certified Public Accountants (AICPA)

  1. A) is responsible for issuing licenses to new CPAs.
  2. B) restricts its membership to CPAs who are independent auditors.
  3. C) sets auditing standards for both public and private companies.
  4. D) sets rules of conduct that CPAs are required to meet.

Answer:  D

Terms:  AICPA has authority to establish standards and rules

Diff:  Moderate

Objective:  LO 2-5

AACSB:  Reflective thinking

3) What are the major functions of the AICPA?

Answer:  Major functions of the AICPA include:

  • Setting standards and rules that all members and other practicing CPAs must follow. These standards consist of auditing standards for auditors of private companies, compilation and review standards, other attestation standards, and the Code of Professional Conduct.
  • Research and publication on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes. AICPA publications include the Journal of Accountancy, industry audit guides for several industries, periodic updates of the Codification of Statements on Auditing Standards, and the Code of Professional Conduct.
  • Promoting the accounting profession through organizing national advertising campaigns
  • Promoting new assurance services
  • Developing specialist certifications to help market and ensure the quality of services in specialized practice areas
  • Writing and grading the uniform CPA examination
  • Providing continuing education seminars for its members

Terms:  Major functions of AICPA

Diff:  Challenging

Objective:  LO 2-5

AACSB:  Reflective thinking

 

 

4) Membership in the AICPA is restricted to CPAs who are currently practicing as independent auditors.

Answer:  FALSE

Terms:  Membership in AICPA

Diff:  Easy

Objective:  LO 2-5

AACSB:  Reflective thinking

 

5) Membership in the AICPA is mandatory for all licensed practicing CPAs.

Answer:  FALSE

Terms:  Membership in AICPA

Diff:  Easy

Objective:  LO 2-5

AACSB:  Reflective thinking

 

6) A CPA must meet continuing education requirements to maintain their license to practice.

Answer:  TRUE

Terms:  Membership in AICPA

Diff:  Easy

Objective:  LO 2-5

AACSB:  Reflective thinking

 

2.6   Learning Objective 2-6

 

1) Which of the following are audit standards used in professional practice by audit firms?

  1. A)
International

Standards

on Auditing

AICPA Auditing Standards  

PCAOB Auditing Standards

Yes No No

 

  1. B)
International

Standards

on Auditing

AICPA Auditing Standards  

PCAOB Auditing Standards

Yes Yes No

 

  1. C)
International

Standards

on Auditing

AICPA Auditing Standards  

PCAOB Auditing Standards

Yes Yes Yes

 

  1. D)
International

Standards

on Auditing

AICPA Auditing Standards  

PCAOB Auditing Standards

No Yes Yes

 

Answer:  C

Terms:  Standards used in professional practice

Diff:  Easy

Objective:  LO 2-6

AACSB:  Reflective thinking

 

2) Who is responsible for establishing auditing standards for privately held companies?

  1. A) Securities and Exchange Commission
  2. B) Public Company Accounting Oversight Board
  3. C) Auditing Standards Board
  4. D) National Association of Accounting

Answer:  C

Terms:  Establishing auditing standards for privately held companies

Diff:  Easy

Objective:  LO 2-6

AACSB:  Reflective thinking

 

 

3) Standards issued by the Public Company Accounting Oversight Board must be followed by CPAs who audit

  1. A) both private and public companies.
  2. B) public companies only.
  3. C) private companies, public companies, and nonprofit entities.
  4. D) private companies only.

Answer:  B

Terms:  Public Company Accounting Oversight Board Standards

Diff:  Moderate

Objective:  LO 2-6

AACSB:  Reflective thinking

Topic:  SOX

4) The International Standards on Auditing (ISA)

  1. A) are issued by the AICPA.
  2. B) override a country’s regulations governing the audit of a company.
  3. C) has many of the same standards as the Auditing Standards Board (ASB).
  4. D) must be followed by companies whose stock is traded in the U.S.

Answer:  C

Terms:  International Standards on Auditing; International Auditing and Assurance Standards Board

Diff:  Moderate

Objective:  LO 2-6

AACSB:  Reflective thinking

 

5) ________ are referred to as U.S. generally accepted auditing standards (GAAS).

  1. A) AICPA auditing standards
  2. B) SEC auditing standards
  3. C) PCAOB auditing standards
  4. D) Sarbanes-Oxley standards

Answer:  A

Terms:  Auditing standards of the United States

Diff:  Moderate

Objective:  LO 2-6

AACSB:  Reflective thinking

 

 

6) Which of the following is a true statement regarding auditing standards?

  1. A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for U.S. public companies.
  2. B) PCAOB auditing standards are applicable to entities outside the U.S.
  3. C) There are no similarities between PCAOB standards and International Standards on Auditing.
  4. D) The Auditing Standards Board has revised most of its standards to converge with the international standards.

Answer:  D

Terms:  Auditing standards of the United States and International Standards of Auditing

Diff:  Easy

Objective:  LO 2-6

AACSB:  Reflective thinking

 

7) Which of the following is true with regards to the various auditing standards?

  1. A) Statements on Auditing Standards (SASs) are issued by the PCAOB.
  2. B) The ASB Clarity Project was intended to make the U.S. auditing standards easier to read, understand, and apply.
  3. C) The ASB redrafted existing AICPA auditing standards to align them with respective ISAs.
  4. D) Both B and C are correct.

Answer:  D

Terms:  Auditing standards of the United States and International Standards of Auditing

Diff:  Challenging

Objective:  LO 2-6

AACSB:  Reflective thinking

8) The PCAOB considers International Standards on Auditing (ISA) when developing its standards.

Answer:  TRUE

Terms:  Public Company Accounting Oversight Board Standards

Diff:  Easy

Objective:  LO 2-6

AACSB:  Reflective thinking

Topic:  SOX

 

9) International Standards on Auditing are issued by the International Auditing and Assurance Standards Board (IAASB).

Answer:  TRUE

Terms:  International Standards on Auditing; International Auditing and Assurance Standards Board

Diff:  Easy

Objective:  LO 2-6

AACSB:  Reflective thinking

 

 

10) The ASB has revised its audit standards to converge with international standards.

Answer:  TRUE

Terms:  Auditing standards of the United States and International Standards of Auditing

Diff:  Easy

Objective:  LO 2-6

AACSB:  Reflective thinking

 

2.7   Learning Objective 2-7

 

1) Historically, auditing standards have been organized into three categories, including

  1. A) standards of field work.
  2. B) purpose of an audit.
  3. C) responsibilities of the auditor.
  4. D) proper planning and supervision.

Answer:  A

Terms:  GAAS, general standards

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

2) The “Principles Underlying an Audit in Accordance with Generally Accepted Auditing Principles” provides a framework to help auditors

  1. A) understand the ten GAAS standards.
  2. B) obtain complete assurance that the financial statements are free from any error.
  3. C) report on the financial statements.
  4. D) prevent fraud.

Answer:  C

Terms:  GAAS; New principles underlying GAAS

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

3) Which of the following is not one of the responsibilities of an auditor under the principles underlying an audit?

  1. A) possess appropriate competence and capabilities
  2. B) comply with ethical requirements
  3. C) plan work and supervise assistants
  4. D) maintain professional skepticism and exercise professional judgment

Answer:  C

Terms:  New principles underlying an audit

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

 

4) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor must fulfill several performance responsibilities, including

  1. A) verifying that all audit work is performed by a CPA with a minimum of three years’ experience.
  2. B) obtaining sufficient, appropriate audit evidence.
  3. C) exercising professional judgment.
  4. D) providing an opinion on the financial statements.

Answer:  B

Terms:  GAAS- New principles underlying GAAS; Purpose of an audit

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

5) The Statements on Auditing Standards issued by the Auditing Standards Board

  1. A) are regarded as authoritative literature.
  2. B) mandate the amount of evidence that must be obtained.
  3. C) must be followed in all situations.
  4. D) are optional guidelines which an auditor may choose to follow or not follow when conducting an audit.

Answer:  A

Terms:  Generally Accepted Auditing Standards

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

6) An auditor need not abide by a particular auditing standard if the auditor believes that

  1. A) the issue in question is immaterial in amount.
  2. B) more expertise is needed to fulfill the requirement.
  3. C) the requirement of the standard has not been addressed by the PCAOB.
  4. D) fraud is involved.

Answer:  A

Terms:  Auditor need not abide by a particular auditing standard

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

7) When assessing the risk of material misstatements in the financial statements,

  1. A) inadequate internal control procedures will mitigate client business risk.
  2. B) GAAS specifies in detail how much and what types of evidence the auditor needs to obtain.
  3. C) company management is responsible for determining materiality levels.
  4. D) the auditor must have an understanding of the client’s business and industry.

Answer:  D

Terms:  Generally Accepted Auditing Standards

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

8) In order to properly plan and perform an audit, an important fact for both the auditor and the client to understand is that

  1. A) the internal control policies and procedures are developed by the auditors.
  2. B) the purpose of an audit is to prevent fraud.
  3. C) management is responsible for the preparation of the financial statements.
  4. D) management can restrict the auditor’s access to important information relevant to the financial statements.

Answer:  C

Terms:  GAAS- New principles underlying GAAS; Purpose of an audit

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

9) The principles underlying an audit

  1. A) contain the procedures that must be followed during an audit.
  2. B) carry the same authority as AICPA auditing standards.
  3. C) only apply to the audits of public companies
  4. D) provide structure for the clarified Codification.

Answer:  D

Terms:  Principles underlying an audit

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

10) The AICPA principles underlying an audit are organized around four principles. Which of the following is not one of those principles?

  1. A) fairness
  2. B) responsibilities
  3. C) reporting
  4. D) performance

Answer:  A

Terms:  Principles underlying an audit

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

11) Which of the following statements about Generally Accepted Audit Standards are true?

  1. They serve as broad guidelines to auditors for conducting an audit engagement.
  2. They are sufficiently specific to provide any meaningful guide to practitioners.

III. They represent a framework upon which the AICPA can provide interpretations.

  1. A) I and II
  2. B) I and III
  3. C) II and III
  4. D) I, II and III

Answer:  B

Terms:  Generally Accepted Auditing Standards

Diff:  Challenging

Objective:  LO 2-7

AACSB:  Reflective thinking

 

12) The AICPA principles and the auditing standards should be viewed by practitioners as

  1. A) ideals to work towards, but which are not achievable.
  2. B) maximum standards that denote excellent work.
  3. C) minimum standards of performance that must be achieved on each audit engagement.
  4. D) benchmarks to be used on all audits, reviews, and compilations.

Answer:  C

Terms:  Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS)

Diff:  Challenging

Objective:  LO 2-7

AACSB:  Reflective thinking

 

13) Which of the following is an accurate statement regarding principles and auditing standards?

  1. A) The principles underlying an audit give specific guidance to an auditor when a problem arises in an audit.
  2. B) The principles underlying an audit state that the only objective of an audit is to provide financial statement users with an opinion.
  3. C) All auditing standards issued by the PCAOB are given two classification numbers.
  4. D) The SAS number identifies the order in which it was issued in relation to other SASs.

Answer:  D

Terms:  Principles underlying an audit versus auditing standards

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

 

14) ________ is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence.

  1. A) Reasonableness
  2. B) Diligence
  3. C) Professional skepticism
  4. D) Competence

Answer:  C

Terms:  Professional skepticism

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

15) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, the auditor fulfills several performance responsibilities, including

  1. A) complying with the AICPA Code of Professional Conduct.
  2. B) issuing a written report on the financial statements.
  3. C) determining and applying materiality levels.
  4. D) having the appropriate competence to perform the audit.

Answer:  C

Terms:  Principles underlying an audit

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

16) List the four principles underlying an audit.

Answer:

  • Purpose of an audit
  • Responsibilities
  • Performance
  • Reporting

Terms:  GAAS; New principles underlying GAAS

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

 

17) Principles related to the auditor’s responsibilities in the audit stress three important personal qualities that the auditor should possess. List and discuss these three qualities.

Answer:

  1. Appropriate competence and capabilities. The auditor is required to have formal education in auditing and accounting, adequate practical experience for the work being performed, and continuing professional education.
  2. Comply with relevant ethical requirements. The AICPA Code of Professional Conduct outlines the ethical requirements for CPAs who practice in accounting firms or work in organizations as part of management. The Code and auditing standards stress the need for independence in audit engagements.
  3. Maintain professional skepticism and exercise professional judgment. Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence. In making judgments about the presence of a material misstatement, auditors are responsible for applying relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.

Terms:  Principles underlying an audit

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

18) Performance is one of the principles underlying an audit. List three performance responsibilities.

Answer:  Performance responsibilities include:

  • obtain reasonable assurance about whether financial statements are free of material misstatement
  • plan work and supervise assistants
  • determine and apply materiality level(s)
  • identify and assess risks of material misstatements based on understanding of the entity and its environment, including internal controls
  • obtain sufficient appropriate audit evidence

Terms:  Principles underlying an audit

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

19) Professional skepticism must be maintained only if the auditor suspects fraud.

Answer:  FALSE

Terms:  Generally Accepted Auditing Standards; Responsibilities

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

 

20) Statements on Auditing Standards (SASs) are issued by the Public Company Accounting Oversight Board.

Answer:  FALSE

Terms:  Statements on Auditing Standards (SAS); Public Company Accounting Oversight Board

Diff:  Easy

Objective:  LO 2-7

AACSB:  Reflective thinking

 

21) The AU-C number identifies the order in which it was issued in relation to all other codified auditing standards.

Answer:  FALSE

Terms:  Classification of auditing standards

Diff:  Moderate

Objective:  LO 2-7

AACSB:  Reflective thinking

 

2.8   Learning Objective 2-8

 

1) Quality control for a CPA firm

  1. A) includes the organizational structure of the firm and the procedures it establishes.
  2. B) is tailored to each specific audit engagement.
  3. C) is a guarantee that auditing standards are followed.
  4. D) is required only for firms auditing SEC companies.

Answer:  A

Terms:  Quality control policies and procedures

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

2) The methods used by a CPA firm to ensure that the firm meets is professional responsibilities to clients and others is

  1. A) continuing professional education.
  2. B) compliance with generally accepted reporting standards.
  3. C) quality control.
  4. D) peer review.

Answer:  C

Terms:  Quality control policies and procedures

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

 

3) Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide its personnel with

  1. A) technical training that assures proficiency as a valuation expert.
  2. B) professional education that is required in order to perform with due professional care.
  3. C) knowledge required to fulfill assigned responsibilities.
  4. D) knowledge required to perform a peer review.

Answer:  C

Terms:  Quality control; Continuing professional education and training activities

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

4) The purpose of establishing quality control policies and procedures to accept or continue a client relationship is to

  1. A) provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.
  2. B) monitor the risk factors concerning misstatements that arise from the misappropriation of assets.
  3. C) document objective criteria for the CPA firm’s peer review.
  4. D) minimize the likelihood of associating with a client whose management may lack integrity.

Answer:  D

Terms:  Purpose of quality control policies and procedures to accept or continue client relationship

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

5) Which of the following is an element of the CPA’s quality control system that should be considered in establishing its quality control policies and procedures?

  1. A) considering audit risk and materiality
  2. B) using statistical sampling techniques
  3. C) assigning personnel to engagements
  4. D) complying with laws and regulations

Answer:  C

Terms:  Quality control policies and procedures

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

6) Which of the following is not an essential component of quality control?

  1. A) policies and procedures to ensure that firm personnel are actively engaged in marketing strategies
  2. B) policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards
  3. C) policies to ensure that personnel maintain their independence in fact and in appearance
  4. D) policies that ensure that monitoring activities are effectively applied

Answer:  A

Terms:  Component of quality control

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

7) Which one of the following is not true regarding the American Institute of Certified Public Accountants peer review requirement?

  1. A) A CPA firm must develop and adhere to quality control standards.
  2. B) Peer reviews are mandatory.
  3. C) A CPA firm will lose AICPA eligibility if a peer review is not performed.
  4. D) Firms required to be registered with and inspected by the PCAOB are exempt.

Answer:  D

Terms:  AICPA peer review

Diff:  Challenging

Objective:  LO 2-8

AACSB:  Reflective thinking

 

8) Discuss the relationship between quality control and generally accepted auditing standards.

Answer:  For a CPA firm, quality control comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others. Quality control is closely related to but distinct from auditing standards. The standards recognize that a quality control system can provide only reasonable assurance, not a guarantee that auditing standards are followed. A CPA firm must make sure that auditing standards are followed on every audit. Quality controls are the procedures used by the entire CPA firm to ensure that the principles in auditing standards are followed on every audit. Quality controls are established for the entire CPA firm, whereas auditing standards are applicable to individual engagements.

Terms:  Relationship between quality control and generally accepted auditing standards

Diff:  Easy

Objective:  LO 2-8

AACSB:  Reflective thinking

 

9) List and describe the six elements of quality control. Who establishes the standards for quality control?

Answer:

  • Leadership responsibilities for quality within the firm — The firm should promote a culture that quality is essential in performing engagements and should establish policies and procedures that support that culture.
  • Relevant ethical requirements All personnel on engagements should maintain independence in mind and in appearance, perform all professional responsibilities with integrity and maintain objectivity in performing their professional responsibilities.
  • Acceptance and continuation of client relationships and engagements Policies and procedures should be established for deciding whether to accept or continue a client relationship or specific engagement. These policies and procedures should minimize the risk of associating with a client whose management lacks integrity. The firm should also only undertake engagements that can be completed with professional competence.
  • Human resources Policies and procedures should be established to provide the firm with reasonable assurance that all new personnel are qualified to perform their work competently, work is assigned to personnel who have adequate technical training and proficiency, all personnel should participate in continuing professional education and professional development activities that enable them to fulfill their assigned responsibilities, and personnel selected for advancement should have the qualifications necessary for the fulfillment of their assigned responsibilities.
  • Engagement performance Policies and procedures should exist to ensure that the work performed by engagement personnel meets applicable professional standards , legal and regulatory requirements, and the firm’s standards of quality.
  • Monitoring Policies and procedures should exist to ensure that the other quality control elements are being effectively applied.

 

Quality control standards are established by the Auditing Standards Board for auditors of private companies and by the Public Company Accounting Oversight Board for auditors of public companies.

Terms:  Elements of quality controls

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

10) Listed below are policies or procedures that the Crystal Cove audit firm has in place. For each identified policy or procedure state if it is an auditing standard or a quality control standard.

 

Audit firm Policy or Procedure

1. Determination on whether to accept or reject a new client.

2. A client evaluation form.

3. All personnel participate in continuing professional education.

4. Conducting the audit with professional skepticism.

5. Answering an independence questionnaire.

6. Determine and apply materiality levels.

7. Audit staff workpapers are reviewed by audit seniors, then managers.

8. Plan work and supervise assistants.

Standards Category

a. auditing standard

b. quality control standard

 

 

Answer:

  1. b
  2. b
  3. b
  4. a
  5. b
  6. a
  7. b
  8. a

Terms:  Auditing standards and quality control standards

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

11) The following are definitions of terms that are listed on the right. Match the definition with its associated term. Each term can be used once, more than once or not at all.

 

Definition

1. an organizational structure where professional services are provided by one or more shareholders

2. the grantor of the right to practice public accounting.

3. a report filed to indicate a significant event

4. sets professional standards and rules for members.

5. oversees accounting firms who audit public companies

6. an organizational structure where the owners are taxed like a partnership and have limited personal liability

7. a report that is filed when a company wishes to issue new securities

8. the methods used to ensure the firm meets its professional responsibilities to clients and others

9. assists in providing investors with reliable information

10. requires annual inspections of accounting firms auditing more than 100 public companies

11. practice monitoring by a CPA firm for another CPA firm

12. fulfilling duties diligently and carefully

13. requires a registration statement

Audit Term

a. AICPA

b. PCAOB

c. Securities Exchange Commission

d. Form 10-K

e. IAASB

f. Form S-1

g. due professional care

h. limited liability partnership

i. professional corporation

j. limited liability company

k. peer review

l. 1933 Securities Act

m. 1934 Securities Act

n. Form 8-K

o. state regulation

p. Code of Professional Conduct

q. quality control standards

r. auditing standards

 

Answer:

  1. i
  2. o
  3. n
  4. a
  5. b
  6. j
  7. f
  8. q
  9. c
  10. b
  11. k
  12. g
  13. l

Terms:  AICPA; PCAOB; Securities Exchange Commission; Form S-1; Form 8-K; Due professional care; Professional Corporation; Limited Liability Company; Peer review; 1933 Securities Act; State Regulation; Quality Control Standards

Diff:  Moderate

Objective:  LO 2-1, LO 2-3, LO 2-4, LO 2-5, and LO 2-8

AACSB:  Reflective thinking

 

12) Quality controls are established for the entire CPA firm whereas auditing standards are applicable to the individual engagement.

Answer:  TRUE

Terms:  Quality controls and auditing standards

Diff:  Moderate

Objective:  LO 2-8

AACSB:  Reflective thinking

 

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 14   Audit of the Sales and Collection Cycle: Tests of Controls

                        and Substantive Tests of Transactions

 

14.1   Learning Objective 14-1

 

1) Which of the following is an account that is not affected by the sales and collection cycle?

  1. A) cash
  2. B) accounts receivable
  3. C) allowance for doubtful accounts
  4. D) accounts payable

Answer:  D

Terms:  Sales and collection cycle

Diff:  Easy

Objective:  LO 14-1

AACSB:  Reflective thinking

 

2) The auditor’s objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a “brick and mortar” business are

  1. A) unchanged.
  2. B) expanded.
  3. C) mitigated.
  4. D) decreased.

Answer:  A

Terms:  Auditor’s objectives for sales and cash collections

Diff:  Moderate

Objective:  LO 14-1

AACSB:  Analytic thinking

 

3) The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards.

Answer:  TRUE

Terms:  Objective in audit of sales and collection cycle; Account balances fairly presented

Diff:  Easy

Objective:  LO 14-1

AACSB:  Reflective thinking

 

4) The sales and collection cycle applies to businesses that sell goods to customers or provide services to customers.

Answer:  TRUE

Terms:  Sales and collection cycle

Diff:  Moderate

Objective:  LO 14-1

AACSB:  Reflective thinking

 

14.2   Learning Objective 14-2

 

1) Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

  1. A) sales returns and allowances
  2. B) write-off of uncollectible accounts
  3. C) bad debt expense
  4. D) interest income

Answer:  D

Terms:  Classes of transactions; Sales and collection cycle

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

2) What event initiates a transaction in the sales and collection cycle?

  1. A) receipt of cash
  2. B) delivery of product to a customer
  3. C) identification of a new customer
  4. D) customer request for goods or services

Answer:  D

Terms:  Customer request for goods

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

3) A ________ is a document that indicates a request for merchandise by a customer.

  1. A) sales invoice
  2. B) vendor invoice
  3. C) customer order
  4. D) sales order

Answer:  C

Terms:  Customer order

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

4) A ________ is a document for communicating the description, quantity, and related information for goods ordered by a customer.

  1. A) sales order
  2. B) customer order
  3. C) vendor invoice
  4. D) sales invoice

Answer:  A

Terms:  Sales order

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

5) What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?

  1. A) determination of correct delivery address
  2. B) credit approval
  3. C) matching of shipping document with sales invoice
  4. D) receipt of sales order from the customer

Answer:  B

Terms:  Goods shipped on account; credit approval

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

6) Before goods are shipped on account, a properly authorized person must

  1. A) prepare the sales invoice.
  2. B) approve the journal entry.
  3. C) approve the customer’s credit.
  4. D) verify that the unit price is accurate.

Answer:  C

Terms:  Goods shipped on account; credit approval

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

7) One type of shipping document is the ________, which is a written contract between the carrier and the seller of the receipt and shipment of goods.

  1. A) sales order
  2. B) bill of lading
  3. C) sales invoice
  4. D) customer order

Answer:  B

Terms:  Document prepared to initiate shipment of goods

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

8) The document used to indicate to the customer the amount of a sale and payment due date is the

  1. A) sales invoice.
  2. B) bill of lading.
  3. C) purchase order.
  4. D) sales order.

Answer:  A

Terms:  Document used to indicate amount of sale and payment due date

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

9) Which of the following is not an important aspect of billing?

  1. A) All shipments made have been billed.
  2. B) No shipment has been billed more than once.
  3. C) Each customer is billed for the proper amount.
  4. D) Credit is approved to customers for sales on account.

Answer:  D

Terms:  Sales and collection cycle

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

10) Most companies recognize sales revenue when

  1. A) sales are invoiced.
  2. B) payment is received from the customer.
  3. C) goods are shipped.
  4. D) the customer’s order is received.

Answer:  C

Terms:  Recognize sales revenue

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

11) Which of the following is not a business function within the “Sales” class of transactions?

  1. A) processing customer orders
  2. B) granting credit
  3. C) processing and recording sales returns and allowances
  4. D) shipping goods

Answer:  C

Terms:  Business function within the sales class of transactions

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

12) The total of the individual account balances in the accounts receivable master file should equal the

  1. A) total sales for the period.
  2. B) balance of the sales account in the general ledger.
  3. C) total sales less the total cash received for the period.
  4. D) balance of the accounts receivable account in the general ledger.

Answer:  D

Terms:  Accounts receivable master file

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

13) In the accounts receivable master file, the length of time the account has been due can be useful to the client and the auditor in preparing the

  1. A) trial balance.
  2. B) working trial balance.
  3. C) accounts receivable trial balance.
  4. D) aged accounts receivable trial balance.

Answer:  D

Terms:  Accounts receivable master file

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

14) A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the

  1. A) accounts receivable subsidiary ledger.
  2. B) monthly statement.
  3. C) remittance advice.
  4. D) sales invoice.

Answer:  B

Terms:  Document sent to customer showing beginning accounts receivable balance

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

15) The document that accompanies the customer’s payment is the

  1. A) credit memo.
  2. B) remittance advice.
  3. C) vendor invoice.
  4. D) monthly statement.

Answer:  B

Terms:  Document that accompanies customer’s payment

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

16) A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.

  1. A) bill of lading
  2. B) sales invoice
  3. C) credit memo
  4. D) monthly statement

Answer:  C

Terms:  Credit memos

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

17) A ________ is a list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and who has no access to the accounting records.

  1. A) prelisting of cash receipts.
  2. B) sales invoice.
  3. C) packing ticket.
  4. D) vendor invoice.

Answer:  A

Terms:  Prelisting of cash receipts

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

18) When dealing with the processing and recording of cash receipts,

  1. A) the most important concern is the theft of cash.
  2. B) theft can only occur before the receipts are entered into the records.
  3. C) cash receipts should be deposited at least monthly.
  4. D) the monthly statement is used to prepare the cash receipts journal.

Answer:  A

Terms:  Processing and recording cash receipts

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

19) Some companies have customers send payments directly to an address maintained by a bank. This is called a(n) ________ system.

  1. A) direct deposit
  2. B) funds transfer
  3. C) lockbox
  4. D) interbank transfer

Answer:  C

Terms:  Payments sent to post office box

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

20) Which of the following is a business function related to sales returns and allowances?

  1. A) processing customer orders
  2. B) writing off uncollectible accounts
  3. C) processing and recording credit memos
  4. D) granting credit

Answer:  C

Terms:  Designing audit procedures sales returns and allowances

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

21) For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?

  1. A) sales order
  2. B) sales invoice
  3. C) customer order
  4. D) remittance advice

Answer:  A

Terms:  Good internal controls in sales and collection cycle; Credit approval

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

22) When posting items sold on account from the sales journal

  1. A)
Details of the journal are posted to Journal totals are posted to
The sales account The general ledger

 

  1. B)
Details of the journal are posted to Journal totals are posted to
The sales account The accounts receivable subsidiary ledger

 

  1. C)
Details of the journal are posted to Journal totals are posted to
The accounts receivable master file The general ledger

 

  1. D)
Details of the journal are posted to Journal totals are posted to
The accounts receivable account in the general ledger The sales account in the general ledger

 

 

Answer:  C

Terms:  Posting from sales journal; Details of journal and journal totals posted

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

 

23) Which document or record is used in the write-off of uncollectible accounts classes of transactions?

  1. A) general journal
  2. B) remittance advice
  3. C) sales transaction file
  4. D) sales order

Answer:  A

Terms:  Business function within the sales class of transactions

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

24) Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?

  1. A) company personnel
  2. B) temporary employees in the town where the lockbox is located
  3. C) bank employees
  4. D) company controller

Answer:  C

Terms:  Opening receipts; Lockbox

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

25) Which of the following is a correct statement regarding the shipment of goods?

  1. A) The shipping document must be in paper form.
  2. B) The shipping document is used to update the perpetual inventory records.
  3. C) Only one copy of the shipping document is needed.
  4. D) All of the above are correct statements.

Answer:  B

Terms:  Shipping records and inventory records

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

26) Which accounts are involved in the sales class of transactions?

  1. A) accounts receivable and sales returns and allowances
  2. B) cash and allowance for uncollectible accounts
  3. C) sales allowances and accounts receivable
  4. D) accounts receivable and sales

Answer:  D

Terms:  Business function within the sales class of transactions

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

27) Explain each of the following types of documents and indicate the class of transactions in which they are commonly used.

  1. customer order
  2. shipping document
  3. remittance advice
  4. sales returns and allowance journal
  5. uncollectible account authorization form

Answer:

  1. Customer order — request for merchandise by a customer. Appears in the sales class of transactions.
  2. Shipping document — document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. Appears in the sales class of transactions.
  3. Remittance advice — document that is mailed to the customer and typically returned to the seller with payment. Appears in the cash receipts class of transactions.
  4. Sales returns and allowance journal — journal used to record all sales returns and allowances. It performs the same function as the sales journal. Appears in the sales returns and allowance class of transactions.
  5. Uncollectible account authorization form — document used internally to indicate authority to write off an account receivable. Appears in the write-off of uncollectible accounts class of transactions.

Terms:  Documents and class of transactions

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

28) You are an audit manager for Rodgers & Co. and have recently taken on a new client, Manufacturing Company. You are in the initial stages of planning the audit and have decided to start gathering information about the sales/collection cycle of the business. List below the classes of transactions that you need to gather audit evidence for in designing your audit procedures.

Answer:  The five classes of transactions that comprise the sales and collection cycle are:

  • sales
  • cash receipts
  • sales returns and allowances
  • write-off of uncollectible accounts
  • bad debt expense

Terms:  Classes of transactions; Sales and collection cycle

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

 

29) Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives?

Answer:  The most important aspects of billing are:

  • to make sure that all shipments made have been billed (completeness)
  • that no shipment has been billed more than once (occurrence)
  • that each shipment is billed for the proper amount (accuracy)

Terms:  Aspects of billing and related objectives

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

30) Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.

Answer:  The four business functions that result in sales transactions, and related documents and records, are:

  • Processing customer orders. Key documents include customer order and sales order
  • Granting credit. Customer order or sales order
  • Shipping goods. Shipping document (bill of lading)
  • Billing customers and recording sales. Sales invoice, sales transaction file, sales journal or listing, accounts receivable master file, accounts receivable trial balance, and monthly statements

Terms:  Business functions that result in sales transactions; Sales and collection cycle; Documents

Diff:  Challenging

Objective:  LO 14-2

AACSB:  Analytic thinking

 

31) Match seven of the terms for documents and records (a-k) with the descriptions provided below (1-7):

 

  1. customer order form
  2. sales order
  3. bill of lading
  4. sales invoice
  5. summary sales report
  6. accounts receivable master file
  7. monthly statement
  8. remittance advice
  9. prelisting of cash receipts
  10. credit memo
  11. uncollectible account authorization form

 

________ 1. A list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and has no access to the accounting records. It is used to verify whether cash received was recorded and deposited at the correct amounts and on a timely basis.

 

________ 2. A document indicating a reduction in the amount due from a customer because of returned goods or an allowance.

 

________ 3. A document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. It is a written contract between the carrier and seller of the receipt and shipment of goods.

 

________ 4. A document for communicating the description, quantity, and related information for goods ordered by a customer. This is frequently used to indicate credit approval and authorization for shipment.

 

________ 5. A document mailed to the customer and typically returned to the seller with the cash payment.

 

________ 6. A document used internally to indicate authority to write-off an account receivable as uncollectible.

 

________ 7. A document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.

Answer:  1. i, 2. j, 3. c, 4. b, 5. h, 6. k, 7. d

Terms:  Documents and records

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

32) A sales invoice is a document that usually indicates credit approval.

Answer:  FALSE

Terms:  Sales invoice; Credit approval

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

33) Credit should be approved before a customer’s order is received.

Answer:  FALSE

Terms:  Credit approved

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

34) Credit should be approved before goods are shipped to a customer.

Answer:  TRUE

Terms:  Credit approved

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

35) The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Answer:  TRUE

Terms:  Customer order

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

36) The preparation of a sales invoice is the final step in the sales and collection cycle.

Answer:  FALSE

Terms:  Sales invoice; Final step in sales and collection cycle

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

37) A bill of lading is a special type of sales invoice used when goods are shipped interstate.

Answer:  FALSE

Terms:  Bill of lading; Sales invoice

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

 

38) The shipping point is critical because it is the first point at which company assets are released to another party.

Answer:  TRUE

Terms:  Shipping point critical; Assets released

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

39) A bill of lading is a written contract between the seller and the buyer.

Answer:  FALSE

Terms:  Bill of lading; Written contract

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

40) In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Answer:  TRUE

Terms:  Lockbox system

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

41) Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.

Answer:  TRUE

Terms:  Sales and collection cycle

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

42) The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

Answer:  FALSE

Terms:  Prelisting of cash receipts

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

43) A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.

Answer:  FALSE

Terms:  Credit memos

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

44) If a company uses a periodic inventory system, the shipping records are used to update the inventory quantities.

Answer:  FALSE

Terms:  Shipping records and inventory records

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Analytic thinking

45) The sales journal is generated from the sales transaction file.

Answer:  TRUE

Terms:  Sales transaction file and sales journal

Diff:  Moderate

Objective:  LO 14-2

AACSB:  Reflective thinking

 

46) When customers purchase goods by credit card, the issuer of the credit card uses EFT to transfer funds into the company’s bank account.

Answer:  TRUE

Terms:  EFT transactions

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

47) The theft of cash can occur before receipts are entered in the records or after they are entered in the records.

Answer:  TRUE

Terms:  Processing and recording cash receipts

Diff:  Easy

Objective:  LO 14-2

AACSB:  Reflective thinking

 

14.3   Learning Objective 14-3

 

1) When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

  1. A) valuation
  2. B) cutoff
  3. C) completeness
  4. D) classification

Answer:  C

Terms:  Tracing of source documents; direction of tests

Diff:  Easy

Objective:  LO 14-3

AACSB:  Reflective thinking

 

 

2) When assessing risk control, the auditor must do all of the following except

  1. A) assess control risk for each objective by evaluating the controls and deficiencies for each objective.
  2. B) perform the detailed test of balances.
  3. C) identify the key internal controls and deficiencies.
  4. D) associate the key controls and deficiencies with the objectives.

Answer:  B

Terms:  Assess control risk

Diff:  Easy

Objective:  LO 14-3

AACSB:  Reflective thinking

3) When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion?

  1. A) accuracy
  2. B) existence
  3. C) completeness
  4. D) none of the above

Answer:  A

Terms:  Reduce substantive tests of transactions

Diff:  Easy

Objective:  LO 14-3

AACSB:  Reflective thinking

 

4) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.

  1. A) accuracy
  2. B) existence
  3. C) completeness
  4. D) none of the above

Answer:  C

Terms:  No substantive tests of transactions; Assertion; understatement of sales

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

5) Which one the following procedures performed for the billing function provides evidence for the completeness assertion?

  1. A) making sure that all shipments have been billed
  2. B) making sure that no shipment has been billed more than twice
  3. C) making sure that each shipment is billed at the correct amount
  4. D) making sure that each shipment is billed to the proper customer

Answer:  A

Terms:  Procedures; Billing function; Completeness assertion

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

6) When assessing planned control risk for sales,

  1. A) the key internal controls and deficiencies for sales will be the same for every company.
  2. B) the audit objectives for sales will differ from company to company.
  3. C) a flowchart is required to help assess control risk for sales.
  4. D) assessing control risk for sales is a highly subjective decision.

Answer:  D

Terms:  Access control risk

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

7) Which of the following is an accurate statement relating to separation of duties?

  1. A) Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer.
  2. B) All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable.
  3. C) The credit granting function should be separate from the sales function.
  4. D) All of the above are accurate statements.

Answer:  D

Terms:  Separation of duties

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

8) Which of the following is not a key control for sales and cash receipts?

  1. A) active board of directors
  2. B) adequate separation of duties
  3. C) internal verification procedures
  4. D) adequate documents and records

Answer:  A

Terms:  Key controls

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

9) Which one of the following statements is true? In deciding on substantive tests of transactions

  1. A) some procedures are commonly employed on every audit regardless of the circumstances.
  2. B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls.
  3. C) results obtained in the prior year’s audit will not affect the procedures used this year.
  4. D) the materiality of the item will not influence the choice of procedures used.

Answer:  A

Terms:  Substantive tests of transactions

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

10) To test for recorded sales for which there were no actual shipments, the auditor vouches from the

  1. A) bill of lading to the sales journal.
  2. B) sales journal to the shipping documents.
  3. C) sales journal to the accounts receivable subsidiary ledger.
  4. D) bill of lading to the supporting customer order and sales order.

Answer:  B

Terms:  Test for recorded sales with no actual shipments

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

11) An effective procedure to test for unfilled shipments is to trace from the

  1. A) sales journal to the shipping documents.
  2. B) shipping documents to the sales journal.
  3. C) sales journal to the accounts receivable ledger.
  4. D) sales journal to the general ledger sales account.

Answer:  B

Terms:  Procedure for unbilled shipments

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

12) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the

  1. A) existence objective.
  2. B) completeness objective.
  3. C) ownership objective.
  4. D) valuation objective.

Answer:  B

Terms:  Trace items from source documents to journals

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

 

13) In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because

  1. A) understatements of assets and income are a greater concern than overstatements.
  2. B) overstatements of assets and income are a greater concern than understatements.
  3. C) it doesn’t matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.
  4. D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Answer:  B

Terms:  Audit of sales transactions; Substantive tests of transactions; Completeness objective

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

14) To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with

  1. A) the original invoices.
  2. B) an approved master price list.
  3. C) the amounts recorded in the sales journal for that transaction.
  4. D) the amounts posted to the customer’s account in the accounts receivable master file.

Answer:  B

Terms:  Sales accurately recorded

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

15) Prenumbered documents are intended to help

  1. A)
Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales
Yes Yes

 

  1. B)
Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales
No No

 

  1. C)
Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales
Yes No

 

  1. D)
Prevent the failure to bill or record sales Prevent duplicate billings or recordings of sales
No Yes

 

Answer:  A

Terms:  Prenumbered documents

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

16) Prenumbered documents will only be useful for control purposes if

  1. A) a different numerical sequence is used for each company.
  2. B) the sequence is accounted for periodically.
  3. C) employees are allowed to use documents out of numerical sequence.
  4. D) the same numerical sequence is used each accounting period.

Answer:  B

Terms:  Prenumbered documents; Control purposes

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

 

17) ________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.

  1. A) Tracing; vouching
  2. B) Vouching; tracing
  3. C) Verifying; tracking
  4. D) Tracking; verifying

Answer:  A

Terms:  Tests for omitted transactions and nonexistent transactions

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

18) Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

  1. A) Credit must be authorized before the sale.
  2. B) Goods must be shipped after the authorization
  3. C) Prices must be authorized.
  4. D) All of the above should be of concern to the auditor.

Answer:  D

Terms:  Authorizations in sales/collection cycle

Diff:  Challenging

Objective:  LO 14-3

AACSB:  Reflective thinking

 

19) Which type of misstatement is always a fraud?

  1. A) sales included in the journals for which no shipment was made
  2. B) sales to related parties, such as officers and subsidiaries
  3. C) shipments made to nonexistent customers and recorded as sales
  4. D) sales recorded more than once.

Answer:  C

Terms:  Fraud and errors

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

20) An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the

  1. A) sales register to the accounts receivable ledger.
  2. B) sales register to the meter department records.
  3. C) accounts receivable ledger to the sales register.
  4. D) meter department records to the sales register.

Answer:  D

Terms:  All customers being billed

Diff:  Challenging

Objective:  LO 14-3

AACSB:  Analytic thinking

 

21) Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mail room?

  1. A) The cashier prepares the daily deposit.
  2. B) The cashier makes the daily deposit at a local bank.
  3. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
  4. D) The cashier endorses the checks.

Answer:  C

Terms:  Incompatible operation if cashier receives remittance; Segregation of duties

Diff:  Challenging

Objective:  LO 14-3

AACSB:  Reflective thinking

22) Which of the following is the appropriate point at which the auditor deems authorization to be critical?

  1. A)
Credit granting Price authorization Shipment of goods
Yes Yes Yes

 

  1. B)
Credit granting Price authorization Shipment of goods
Yes No Yes

 

  1. C)
Credit granting Price authorization Shipment of goods
No Yes No

 

  1. D)
Credit granting Price authorization Shipment of goods
Yes No No

 

Answer:  A

Terms:  Point authorization deemed critical

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

23) Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

  1. A) granting of credit
  2. B) shipment of goods
  3. C) determination of discounts
  4. D) selling of goods for cash

Answer:  D

Terms:  Specific authorization to conduct sales transactions

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

24) As a test of control, the auditor examines sales invoices for supporting documents. The relevant transaction-related audit objective is

  1. A) accuracy.
  2. B) occurrence.
  3. C) classification.
  4. D) timing.

Answer:  A

Terms:  Transaction-related audit objectives

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

25) The accurate recording of sales transactions concerns all of the following except for

  1. A) proper credit authorization.
  2. B) shipping the amount of goods ordered.
  3. C) accurately billing for the amount of goods shipped.
  4. D) accurately recording the amount billed in the accounting records.

Answer:  A

Terms:  Sales recorded

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

26) In designing substantive audit procedures for tests of transactions for sales, the auditor needs to test for evidence of misstatements due to errors or fraud. Describe two potential errors (unintentional) and one intentional (fraud).

Answer:

  1. Unintentional–sales included in the journals for which no shipment was made and sales that were recorded more than once.
  2. Intentional (fraud)–shipments made to nonexistent customers and recorded as sales.

Terms:  Substantive audit procedures for tests of transactions for sales; Misstatements; Fraud

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

 

27) For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement.

  • sales included in the journals for which there was no shipment
  • sale recorded more than once
  • shipments made to nonexistent customers and recorded as sales

Answer:  The potential audit tests include the following:

  • Sales included in the journals for which there was no shipment. Vouch selected entries in the sales journal to related copies of shipping and other supporting documents to make sure they occurred.
  • Sale recorded more than once. Review a numerically sorted list of recorded sales transactions for duplicate numbers. The auditor can also test for proper cancellation of shipping documents.
  • Shipments made to nonexistent customers and recorded as sales. Trace customer information on sales invoices to the customer master file.

Terms:  Audit test used to detect misstatement

Diff:  Challenging

Objective:  LO 14-3

AACSB:  Reflective thinking

 

28) The auditor is concerned about authorization at three key points. What are the key points?

Answer:

  1. Credit must be properly authorized before a sale takes place.
  2. Goods should be shipped only after proper authorization.
  3. Prices including base terms, freight, and discounts must be authorized.

Terms:  Proper authorization at key points

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

29) Separation of duties in the sales and collection cycle should mandate that the credit-granting function be separate from the sales function.

Answer:  TRUE

Terms:  Separation of duties in the sales and collection cycle; credit-granting function

Diff:  Easy

Objective:  LO 14-3

AACSB:  Reflective thinking

 

30)  Tracing from source documents to the journal is useful for testing the existence objective.

Answer:  FALSE

Terms:  Tracing; Existence objective

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

 

31) The extent of tests of controls in audits of nonpublic companies depends on the effectiveness of the controls and the extent to which the auditor believes they can be relied on to reduce control risk.

Answer:  TRUE

Terms:  Tests of controls

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

32) For each key control, one or more tests of controls must be designed to verify its effectiveness.

Answer:  TRUE

Terms:  Key controls

Diff:  Easy

Objective:  LO 14-3

AACSB:  Reflective thinking

 

33) Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Answer:  FALSE

Terms:  Misstatements involving the completeness objective for sales

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

34) Violations of the occurrence/existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

Answer:  TRUE

Terms:  Violations of the existence objective for sales; violations of the completeness objective

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

35) An effective procedure to test the occurrence/existence objective for sales is to vouch sales journal entries to copies of sales orders, shipping documents, and sales invoices.

Answer:  TRUE

Terms:  Procedure to test the existence objective for sales

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

 

36) For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.

Answer:  TRUE

Terms:  Significant internal control deficiency; Tests of controls

Diff:  Challenging

Objective:  LO 14-3

AACSB:  Reflective thinking

 

37) The appropriate tests of controls for separation of duties are ordinarily restricted to the auditor’s observations of activities and discussions with personnel.

Answer:  TRUE

Terms:  Test of controls for separation of duties

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

38) Auditing standard indicate that if the auditor identifies a significant risk at the assertion level, the auditor is not required to perform substantive procedures.

Answer:  FALSE

Terms:  Substantive test of transactions

Diff:  Moderate

Objective:  LO 14-3

AACSB:  Reflective thinking

 

14.4   Learning Objective 14-4

 

1) Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences?

  1. A) risk and emphasis on the completeness objective
  2. B) materiality and emphasis on the accuracy objective
  3. C) risk and emphasis on the classification objective
  4. D) materiality and emphasis on the occurrence objective

Answer:  D

Terms:  Transaction-related audit objectives for credit memos and sales

Diff:  Moderate

Objective:  LO 14-4

AACSB:  Reflective thinking

 

2) Smith Manufacturing Company’s accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to

  1. A) prenumber and account for all credit memorandums.
  2. B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
  3. C) have independent sales and accounts receivable departments.
  4. D) mail monthly statements to customers.

Answer:  B

Terms:  Fictitious credit memos; Procedure to prevent activity

Diff:  Challenging

Objective:  LO 14-4

AACSB:  Analytic thinking

 

3) The transaction-related audit objectives and the client’s methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor’s perspective?

Answer:  The first difference is materiality. In many instances, sales returns and allowances are so immaterial that auditors ignore them. The second difference is the emphasis on the occurrence objective. For sales returns and allowances, auditors usually emphasize testing recorded transactions to uncover any theft of cash from the collection of accounts receivable that was covered up by a fictitious sales return or allowance.

Terms:  Transaction-related audit objectives for credit memos and sales

Diff:  Moderate

Objective:  LO 14-4

AACSB:  Reflective thinking

 

4) When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Answer:  TRUE

Terms:  Sales returns and allowances; Objective of occurrence

Diff:  Easy

Objective:  LO 14-4

AACSB:  Reflective thinking

 

5) Sales returns and allowances are often ignored by auditors because they are often immaterial.

Answer:  TRUE

Terms:  Sales returns and allowances; Immaterial

Diff:  Moderate

Objective:  LO 14-4

AACSB:  Reflective thinking

 

 

6) When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.

Answer:  FALSE

Terms:  Auditing sales returns and allowances; Completeness objective

Diff:  Moderate

Objective:  LO 14-4

AACSB:  Reflective thinking

14.5   Learning Objective 14-5

 

1) When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer’s account that employee may be suspected of

  1. A) kiting.
  2. B) lapping.
  3. C) floating.
  4. D) shorting.

Answer:  B

Terms:  Lapping

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Analytic thinking

 

2) An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting

  1. A) kiting.
  2. B) lapping.
  3. C) unauthorized write-offs of customers as uncollectible accounts.
  4. D) sales without proper credit authorization.

Answer:  B

Terms:  Lapping

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

3) Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization?

  1. A) Observe whether monthly statements are sent.
  2. B) Observe unrecorded cash at a point in time.
  3. C) Observe whether the accountant reconciles the bank account.
  4. D) Observe endorsement of incoming checks.

Answer:  A

Terms:  Posting and summarization transaction-related audit objective

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

4) The audit procedure referred to as proof of cash receipts is particularly useful to test

  1. A) time lags in making deposits.
  2. B) whether all recorded cash receipts have been deposited in the bank.
  3. C) whether there are cash receipts that have not been recorded in the journals.
  4. D) the client’s reconciliation between cash receipts and bank deposits.

Answer:  B

Terms:  Audit procedure; Proof of cash receipts

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Analytic thinking

5) Which of the following test of controls is useful to test the completeness objective for cash receipts?

  1. A) Compare shipping documents with sales records.
  2. B) Observe endorsement of incoming checks.
  3. C) Examine evidence that the receivable master file is reconciled to the general ledger.
  4. D) Observe if the client reconciles the bank account.

Answer:  B

Terms:  Audit procedures; Test completeness objective (assertion) for cash receipts

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

6) When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that

  1. A) the test of controls are designed to test for monetary misstatements.
  2. B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales.
  3. C) the tests of controls are not dependent on the controls the auditor identifies.
  4. D) the tests of controls is not dependent on whether the company being audited is publicly traded.

Answer:  B

Terms:  Designing tests of controls and substantive tests of transactions for cash receipts

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

 

7) Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?

  1. A) understating the sales journal by not recording cash sales
  2. B) overstating the accounts receivable control account by intentionally misstating prices charged for goods sold
  3. C) overstating the accounts receivable subsidiary ledger by not recording payments made by customers
  4. D) understating the cash receipts journal by purposely recording incorrect amounts

Answer:  A

Terms:  Cash receipts from sales on account; Misappropriated; Fraud

Diff:  Challenging

Objective:  LO 14-5

AACSB:  Reflective thinking

8) Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected “lapping” problem with trade accounts receivable?

  1. A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
  2. B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
  3. C) Have a mandatory vacation policy for employees who both handle cash and enter cash receipts into the system.
  4. D) Request that customer’s payment checks be made payable to the company and addressed to the treasurer.

Answer:  C

Terms:  Prevent lapping problem

Diff:  Challenging

Objective:  LO 14-5

AACSB:  Reflective thinking

 

9) The most difficult type of cash embezzlement for auditors to detect is when it occurs

  1. A) after the merchandise has been shipped.
  2. B) before the merchandise has been shipped.
  3. C) before the cash is recorded in the cash receipts journal or other cash listing.
  4. D) after the cash is recorded in the cash receipts journal or other cash listing.

Answer:  C

Terms:  Cash embezzlement

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

 

10) The completeness transaction-related audit objective must be considered when determining key controls for sales. List three of the key controls that must be considered when cash received is recorded in the cash receipts journal.

Answer:

(1) Is a prelisting of cash receipts prepared?

(2) Are checks restrictively endorsed?

(3) Are the batch totals of cash receipts compared with the computer summary?

(4) Are statements sent to customers each month?

Terms:  Completeness assertion for cash receipts and existing controls

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

11) Explain what lapping means, and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping.

Answer:  Lapping, which is a common type of embezzlement, is the postponement of entries for the collection of receivables to conceal an existing cash shortage. The embezzlement is perpetrated by a person who handles cash receipts and then enters them into the computer system. He or she defers recording the cash receipts from one customer and covers the shortages with subsequent receipts of another. These in turn are covered from the receipts of a third customer a few days later. The employee must continue to cover the shortage through repeated lapping, replace the stolen money, or find another way to conceal the shortage.

 

The embezzlement can be easily prevented by separation of duties and a mandatory vacation policy for employees who handle cash and enter cash receipts into the system. It can be detected by comparing the name, amount, and dates shown on remittance advices with cash receipts journal entries and related duplicate deposit slips. Because this procedure is relatively time-consuming, it is ordinarily performed only when specific concerns with embezzlement exist because of a deficiency in internal control.

Terms:  Lapping

Diff:  Challenging

Objective:  LO 14-5

AACSB:  Reflective thinking

 

 

12) You are part of the audit team that is auditing Hillsburg Hardware Co. and you have been assigned to the sales and collection cycle. You are testing whether the cash receipts are deposited and recorded at the amounts received (accuracy objective). List two tests of controls and one test of transactions that you would do to satisfy yourself regarding the accuracy objective.

Answer:

Control Tests:

  1. Observe whether the accountant reconciles the bank account.
  2. Examine file of batch totals for initials of data control clerk.
  3. Observe whether monthly statements are sent.

 

Transaction Tests:

  1. Obtain prelisting of cash receipts and trace amounts to the cash receipts journal, testing for names, amounts, and dates.
  2. Prepare proof of cash receipts.

Terms:  Sales and collection business process; Tests of controls and test of transactions for accuracy objective

Diff:  Challenging

Objective:  LO 14-5

AACSB:  Reflective thinking

13) In planning the audit, an auditor takes three basic steps in determining the audit procedures to be performed for any business cycle or class of transactions in order to gather audit evidence concerning possible misstatement due to error or fraud. List those three basic steps below.

Answer:  The three basic steps in designing tests of controls and substantive tests of transactions are:

  • Determine key internal controls for each audit objective.
  • Design tests of controls for each control used to support a reduced control risk.
  • Design substantive tests of transactions to test for monetary misstatements for each objective.

Terms:  Audit procedures performed for business cycle or class of transactions

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

14) The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal.

Answer:  TRUE

Terms:  Cash embezzlement

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

 

15) An essential part of the auditor’s responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud.

Answer:  TRUE

Terms:  Cash receipts from sales on account; Misappropriated; Fraud

Diff:  Moderate

Objective:  LO 14-5

AACSB:  Reflective thinking

 

14.6   Learning Objective 14-6

 

1) The auditor’s primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is

  1. A) examining authorized credit memos.
  2. B) examining the uncollectible account authorization form.
  3. C) examining debit memos.
  4. D) examining the vouchers payable register.

Answer:  B

Terms:  Audit procedures; Write-off of uncollectible accounts; Fraud

Diff:  Challenging

Objective:  LO 14-6

AACSB:  Reflective thinking

 

2) The estimation of bad debts expense relates to the write-off of uncollectible accounts.

Answer:  TRUE

Terms:  Audit test for write-off of uncollectible accounts

Diff:  Easy

Objective:  LO 14-6

AACSB:  Reflective thinking

3) There should generally be correspondence in the client’s file establishing the uncollectibility of their account.

Answer:  TRUE

Terms:  Audit test for write-off of uncollectible accounts

Diff:  Easy

Objective:  LO 14-6

AACSB:  Reflective thinking

 

4) Realizable value is an essential balance-related audit objective for accounts receivable.

Answer:  TRUE

Terms:  Realizable value for accounts receivable

Diff:  Easy

Objective:  LO 14-6

AACSB:  Reflective thinking

 

 

14.7   Learning Objective 14-7

 

1) The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on

  1. A) bad debt expense.
  2. B) the analytical tests to be performed.
  3. C) the confirmation of accounts receivable.
  4. D) the impact of processing cash receipts.

Answer:  C

Terms:  Effect of results of tests of controls and substantive tests of transactions in the sales and collection cycle

Diff:  Moderate

Objective:  LO 14-7

AACSB:  Reflective thinking

 

2) At the completion of the tests of controls and substantive tests of transactions, auditors must analyze each exception to determine its cause and the implication of the exception on assessed control risk.

Answer:  TRUE

Terms:  Effect of results of tests of controls and substantive tests of transactions in the sales and collection cycle

Diff:  Moderate

Objective:  LO 14-7

AACSB:  Reflective thinking

 

Chapter 16

Nonparametric Tests

 

True / False Questions

1. Nonparametric tests can be used in small samples.

True    False

 

2. Nonparametric tests may require special tables for small samples.

True    False

 

3. Nonparametric tests generally are more powerful than parametric tests when normality cannot be assumed.

True    False

 

4. Parametric tests generally are more powerful than nonparametric tests when normality can be assumed.

True    False

 

5. Rejection of a hypothesis using a nonparametric test is less convincing than using an equivalent parametric test, since nonparametric tests generally make fewer assumptions.

True    False

 

6. Rejection of a hypothesis using a nonparametric test is more convincing than using an equivalent parametric test when the data are badly skewed.

True    False

 

7. If the population is normal, we would usually prefer a nonparametric test.

True    False

 

8. Most nonparametric tests assume ordinal data.

True    False

 

9. Most nonparametric tests require data measured on a ratio scale.

True    False

 

10. The one-sample runs test compares medians of two or more groups.

True    False

 

11. The one-sample runs test uses binary data (only two possible values).

True    False

 

12. The Spearman rank correlation test compares medians of two paired data sets.

True    False

 

13. The one-sample runs test uses a test statistic that is normally distributed, as long as the number of runs of each type is large enough.

True    False

 

14. The one-sample runs test is useful to detect nonrandom patterns in time-series data.

True    False

 

15. The one-sample runs test is similar to a test for autocorrelation.

True    False

 

16. The one-sample runs test is also called the Wald-Wolfowitz test named after its inventors.

True    False

 

17. The Wilcoxon signed-rank test is useful to compare one sample median with a benchmark.

True    False

 

18. The Wilcoxon signed-rank test is useful to compare more than two sample medians.

True    False

 

19. The Wilcoxon signed-rank test is analogous to a one-sample parametric test of a mean.

True    False

 

20. The Wilcoxon signed-rank test is analogous to a parametric two-sample t test of means from independent samples.

True    False

 

21. The Wilcoxon signed-rank test is analogous to a parametric t test comparing three or more medians.

True    False

 

22. The Wilcoxon signed-rank test is robust to outliers in the data if the population is at least somewhat symmetric.

True    False

 

23. The Wilcoxon signed-rank test does not assume a normal population, but it does require a roughly symmetric population.

True    False

 

24. The Wilcoxon signed-rank test is less powerful than a one-sample test of a mean when the population is actually normal.

True    False

 

25. The Wilcoxon signed-rank test has good power over a range of nonnormal populations.

True    False

 

26. The Wilcoxon signed-rank test is an alternative to the one-sample t test for paired observations.

True    False

 

27. The Wilcoxon rank sum test (Mann-Whitney test) can be used as a test for equality of two population medians.

True    False

 

28. The Wilcoxon rank sum test (Mann-Whitney test) requires two independent samples.

True    False

 

29. The Wilcoxon rank sum test (Mann-Whitney test) can be used even if population variances are unequal.

True    False

 

30. The Wilcoxon rank sum test (Mann-Whitney test) utilizes the ranks of two independent samples.

True    False

 

31. The Mann-Whitney test is sometimes called the “Wilcoxon rank sum test” because it was formulated independently by different statisticians.

True    False

 

32. We sometimes call the Wilcoxon rank sum test the Mann/Whitney test, but the two are the same.

True    False

 

33. The Mann-Whitney test is analogous to a one-sample t test comparing a mean with a benchmark.

True    False

 

34. The Kruskal-Wallis test requires c independent samples (where usually c > 2).

True    False

 

35. The Kruskal-Wallis test applies even if the c samples to be compared are not independent.

True    False

 

36. The Kruskal-Wallis test is analogous to the one-sample parametric t test for a mean.

True    False

 

37. The Kruskal-Wallis test is analogous to the parametric one-factor ANOVA.

True    False

 

38. The Kruskal-Wallis test does not require normal populations, but it does require them to be of similar shape.

True    False

 

39. The Kruskal-Wallis test is equivalent to comparing medians in c groups.

True    False

 

40. The Kruskal-Wallis test is a test for randomness in sequential data.

True    False

 

41. The Kruskal-Wallis test is less useful in finance or marketing, because normal populations can usually be assumed in financial or marketing data.

True    False

 

42. The Kruskal-Wallis test is almost as powerful as one-factor ANOVA even when normality can be assumed.

True    False

 

43. The Friedman test is a nonparametric equivalent to two-factor ANOVA without replication.

True    False

 

44. The Friedman test is a nonparametric equivalent to a parametric one-sample t test comparing a mean with a benchmark.

True    False

 

45. The Friedman test requires groups of equal size.

True    False

 

46. The Friedman test compares medians when there are two grouping factors (rows, columns).

True    False

 

47. The Friedman test resembles the Kruskal-Wallis test except that there are two grouping factors (rows, columns) instead of one grouping factor (columns).

True    False

 

48. The Friedman test is often almost as powerful as two-factor ANOVA without replication (randomized block design).

True    False

 

49. Spearman’s rank correlation always lies within the range -1.00 to +1.00.

True    False

 

50. Spearman’s rank correlation coefficient lies within the range 0 to 1.00 inclusive.

True    False

 

51. Spearman’s rank correlation is named for a British brewer who was testing beer samples.

True    False

 

52. Spearman’s rank correlation is named for a British behavioral psychologist who was studying human intelligence.

True    False

 

53. Spearman’s rank correlation is used to measure agreement in rankings of paired (x, y) data.

True    False

 

 

Multiple Choice Questions

54. All of these are nonparametric tests except:

A. Spearman rank correlation test.

 

B. Friedman test.

 

C. Student’s t test.

 

D. Kruskal-Wallis test.

 

55. Which nonparametric test is analogous to a parametric two-sample t test for means?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

56. Which nonparametric test is analogous to a parametric k-sample test for means?

A. Kruskal-Wallis test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Wald-Wolfowitz one-sample runs test

 

57. Which nonparametric test is used to compare a one-sample median with a benchmark?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

58. Which nonparametric test has no parametric counterpart?

A. Wald-Wolfowitz one-sample runs test

 

B. Spearman rank correlation test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

59. Which nonparametric test is analogous to a parametric one-sample t test for differences in paired data?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

60. Which nonparametric test would we use to compare ratings assigned to n pairs of bonds by two different rating agencies, if the bonds are rated on an ordinal scale (Aaa, Aa, A, Baa, Ba B, etc.)?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

61. Which is not true of the one-sample runs test?

A. It is also called the Wald-Wolfowitz test named after its inventors.

 

B. Its purpose is to detect nonrandomness.

 

C. It cannot be applied to sequential observations.

 

D. It is similar to a test for autocorrelation.

 

62. Which nonparametric test is used to detect nonrandomness in sequential observations?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

63. Which is a nonparametric test for runs (autocorrelation) in a sequence of binary data?

A. Kruskal-Wallis test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Wald-Wolfowitz one-sample runs test

 

64. Which parametric test resembles the nonparametric Spearman’s rank test?

A. t test of a correlation coefficient

 

B. t test of two sample means

 

C. t test of one sample mean

 

D. F test of variances

 

65. Which nonparametric test is used to test for agreement in ranks of paired data?

A. Spearman test

 

B. Friedman test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

66. Twenty customers are randomly chosen and each is given a sample of Nut Butter ice cream to taste. The customers rank the taste of the ice cream on a 10-point scale. Each is then given a sample of Chewy Gooey ice cream to taste and rank on a 10-point scale. Based on the 20 customers’ ratings of each flavor, the research analyst conducting the survey wishes to determine if one flavor is preferred over the other. Which nonparametric test would you use to determine if there is a difference in the ratings?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

67. Which is not a characteristic of the Wilcoxon rank sum (Mann-Whitney) test?

A. It can be used as a test for equality of two population medians.

 

B. It is analogous to a one-sample t test comparing a mean with a benchmark.

 

C. It requires independent samples from populations with equal variances.

 

D. It is similar to one-factor ANOVA when we have c independent samples.

 

68. Delta Air Lines wants to determine if the number of no-shows for flights originating from Detroit is higher than from Minneapolis. A sample of 20 flights from each city is taken and the number of no-shows is determined for each flight. Which nonparametric test would you use to determine whether the number of no-shows is greater in Detroit?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

 

69. The dean of Oxnard business school wants to know if there is a difference in computer skills in four majors (marketing, finance, operations, accounting). A 20-question skills test is given to 10 randomly chosen students in each major. Which nonparametric test could be used by the dean to see if there is a difference in computer skills of students in the various majors?

A. Wald-Wolfowitz test

 

B. Wilcoxon signed-rank test

 

C. Mann-Whitney test

 

D. Kruskal-Wallis test

 

70. Which is not a characteristic of the Kruskal-Wallis test?

A. It is analogous to the parametric one-factor ANOVA.

 

B. It does not make any assumptions about the populations.

 

C. It is useful in comparing the medians in c groups.

 

D. It does not require normal distributions of populations.

 

71. Individuals in four different age groups are asked to rate, on a scale of 1 to 10, three flavors of ice creams. Each group has the same number of individuals. Median ratings by the individuals are grouped by the flavor of ice cream and by age group. Which nonparametric test could be used to see if there is a difference in median ratings among the four age groups and three flavors?

A. Wilcoxon signed-rank test

 

B. Friedman test

 

C. Mann-Whitney test

 

D. Kruskal-Wallis test

 

72. Which nonparametric test is analogous to a two-factor ANOVA without replication?

A. Wilcoxon signed-rank test

 

B. Friedman test

 

C. Mann-Whitney test

 

D. Kruskal-Wallis test

 

73. If there are three or more populations with ordinal data, what is the appropriate test to determine whether the distributions are equal?

A. Friedman test

 

B. t test

 

C. ANOVA

 

D. Kruskal-Wallis test

 

74. Hoping to reduce the waiting time, a doctor’s office tried a new way of scheduling its appointments. Populations of waiting times are believed to be similar except in central tendency. However, waiting times may not be normally distributed, so a nonparametric test was chosen to compare the waiting times. The Wilcoxon/Mann-Whitney test results are shown below:

Which is the best conclusion?

A. The medians differ at α = .01.

 

B. The means differ at α = .01.

 

C. The samples differ at α = .01.

 

D. There are no differences at α = .01.

 

75. At the Food Barn, children can order from the adult menu (A) or the child’s menu (C). Below is the pattern of menu orders for 24 children last Wednesday evening.

A, A, A, A, C, A, A, C, C, C, A, A, A, A, A, A, C, C, C, A, C, C, C, C

Which test would you choose to see if this pattern is random?

A. Kruskal-Wallis test

 

B. Wilcoxon rank sum (Mann-Whitney) test

 

C. Wald-Wolfowitz one-sample runs test

 

D. Wilcoxon test

 

76. At the Food Barn, children can order from the adult menu (A) or the child’s menu (C). Below is the pattern of menu orders for 24 children last Wednesday evening.

A, A, A, A, C, A, A, C, C, C, A, A, A, A, A, A, C, C, C, A, C, C, C, C

Which statement is most accurate?

A. Neither sample size (for outcomes A or C) is large enough for a runs test using z.

 

B. Both sample sizes (for outcomes A and C) are large enough for a runs test using z.

 

C. Only one outcome has a large enough sample for a runs test using z.

 

D. This type of data would not be suited for a runs test using z.

 

77. A clinic has four doctors. They wish to compare the amount of time that doctors spend with their patients. It is suspected that times may not be normally distributed but are otherwise assumed similar except in center, so a nonparametric test was chosen. The Kruskal-Wallis test results are shown below.

Which is the best conclusion?

A. The doctors have the same median times at α = .01.

 

B. The doctors have different median times at α = .01.

 

C. The sample size is insufficient for this kind of test.

 

D. A one-factor ANOVA would be a better kind of test.

 

78. Returns on an investor’s stock portfolio (n = 19 stocks) are compared for the same stock in each of two consecutive quarters. Since the returns are not normally distributed (normality test p-values were .005 and .126 respectively), a nonparametric test was chosen. The test results are shown below.

Which is the best conclusion?

A. The means are the same at α = .01.

 

B. The medians are the same at α = .01.

 

C. The means differ at α = .01.

 

D. The medians differ at α = .01.

 

79. Returns on an investor’s stock portfolio (n = 19 stocks) are compared for the same stock in each of two consecutive quarters. Since the returns are not normally distributed (normality test p-values were .005 and .126 respectively), a nonparametric test was chosen. The test results are shown below.

Which is the best conclusion?

A. The returns are correlated neither at α = .05 nor at α = .01.

 

B. The returns are correlated at α = .05 but not at α = .01.

 

C. The returns are correlated at α = .01 but not at α = .05.

 

D. The returns are correlated both at α = .05 and at α = .01.

 

80. Attendees at an outdoor concert can buy pavilion tickets (A) or lawn tickets (B). Below is the output for the one-sample runs to test whether there is a pattern in 32 consecutive ticket purchases.

The best conclusion at α = .05 would be:

A. the pattern is random.

 

B. there is a difference in medians.

 

C. the sample sizes are too small.

 

D. the sample sizes must be equal.

 

81. To compare the cost of three shipping methods, a firm shipped five orders to each of four different destinations over a six-month period. Their total shipping costs are shown below.

Which nonparametric test would you use to compare the median shipping costs among destinations and among shippers?

A. Friedman test

 

B. Kruskal-Wallis test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Lebesgue-Stieltjes test

 

82. At the Seymour Clinic, the total number of patients seen by three doctors over three days is as follows:

Which nonparametric test would you use to compare the median number of patients seen by the doctors on each day?

A. Wilcoxon test

 

B. Kruskal-Wallis test

 

C. Anderson-Darling test

 

D. Friedman test

 

83. Systolic blood pressure of randomly selected HMO patients was recorded on a particular Wednesday, with the results shown here:

The appropriate hypothesis test to compare the medians is:

A. Wilcoxon test.

 

B. Kruskal-Wallis test.

 

C. Levene’s test.

 

D. Friedman test.

 

84. You do not wish to assume normality in the population, yet you wish to compare central tendency in c samples. You decide to utilize MegaStat, whose menu is shown here:

Which menu would you choose?

A. Hypothesis Tests

 

B. Nonparametric Tests

 

C. Correlation/Regression

 

D. Analysis of Variance

 

85. You do not wish to assume normality in the population, yet you wish to compare central tendency in c samples. You decide to utilize MINITAB, whose menu is shown here:

Which menu would you choose?

A. ANOVA

 

B. Regression

 

C. Nonparametrics

 

D. EDA

 

Chapter 16 Nonparametric Tests Answer Key

True / False Questions

1. Nonparametric tests can be used in small samples.

TRUE

Special tables (or suitable software) are required when sample sizes are small.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

2. Nonparametric tests may require special tables for small samples.

TRUE

Special tables (or suitable computer software) will be required for small samples.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

3. Nonparametric tests generally are more powerful than parametric tests when normality cannot be assumed.

TRUE

When justified, parametric tests generally have more power (but at the cost of making more restrictive assumptions).

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

4. Parametric tests generally are more powerful than nonparametric tests when normality can be assumed.

TRUE

When justified, parametric tests generally have more power.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

5. Rejection of a hypothesis using a nonparametric test is less convincing than using an equivalent parametric test, since nonparametric tests generally make fewer assumptions.

FALSE

Rejection in a nonparametric test is persuasive because fewer assumptions are made.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

6. Rejection of a hypothesis using a nonparametric test is more convincing than using an equivalent parametric test when the data are badly skewed.

TRUE

Rejection in a nonparametric test is persuasive when normality is in doubt.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

7. If the population is normal, we would usually prefer a nonparametric test.

FALSE

When justified, parametric tests generally have more power.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

8. Most nonparametric tests assume ordinal data.

TRUE

Many nonparametric tests convert ratio or interval data into ranks (ordinal data).

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

9. Most nonparametric tests require data measured on a ratio scale.

FALSE

Many nonparametric tests convert ratio or interval data into ranks (ordinal data).

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

10. The one-sample runs test compares medians of two or more groups.

FALSE

The runs test checks for randomness.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

11. The one-sample runs test uses binary data (only two possible values).

TRUE

Data may be any sequence of two values (e.g., + or -).

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

12. The Spearman rank correlation test compares medians of two paired data sets.

FALSE

To compare medians we use a Mann-Whitney test (Wilcoxon rank sum test).

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

13. The one-sample runs test uses a test statistic that is normally distributed, as long as the number of runs of each type is large enough.

TRUE

As long as we have enough runs of each type, we can use a normal z test.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

14. The one-sample runs test is useful to detect nonrandom patterns in time-series data.

TRUE

Random pattern is essentially the null hypothesis.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

15. The one-sample runs test is similar to a test for autocorrelation.

TRUE

We can use the runs test to check for autocorrelation in regression residuals.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

16. The one-sample runs test is also called the Wald-Wolfowitz test named after its inventors.

TRUE

Wald and Wolfowitz first demonstrated the runs test, so it goes by either name.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

17. The Wilcoxon signed-rank test is useful to compare one sample median with a benchmark.

TRUE

The null hypothesis is for one population median versus a target or benchmark.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

18. The Wilcoxon signed-rank test is useful to compare more than two sample medians.

FALSE

For two medians, we would use the Wilcoxon rank sum test (Mann-Whitney test).

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

19. The Wilcoxon signed-rank test is analogous to a one-sample parametric test of a mean.

TRUE

The idea is to test a measure of center (in this case, a median) against a benchmark.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

20. The Wilcoxon signed-rank test is analogous to a parametric two-sample t test of means from independent samples.

FALSE

For two medians, we would use the Wilcoxon rank sum test (Mann-Whitney test).

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

21. The Wilcoxon signed-rank test is analogous to a parametric t test comparing three or more medians.

FALSE

The null hypothesis is for one population median versus a target or benchmark.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

22. The Wilcoxon signed-rank test is robust to outliers in the data if the population is at least somewhat symmetric.

TRUE

The test does require reasonably symmetric populations.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

23. The Wilcoxon signed-rank test does not assume a normal population, but it does require a roughly symmetric population.

TRUE

The test does require reasonably symmetric populations.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

24. The Wilcoxon signed-rank test is less powerful than a one-sample test of a mean when the population is actually normal.

TRUE

When justified, a t test of a mean would generally be more powerful.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

25. The Wilcoxon signed-rank test has good power over a range of nonnormal populations.

TRUE

Studies show good power when populations are not too skewed.

 

AACSB: Analytical Thinking
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Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

26. The Wilcoxon signed-rank test is an alternative to the one-sample t test for paired observations.

TRUE

One version of the Wilcoxon signed-rank test utilizes paired data.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

27. The Wilcoxon rank sum test (Mann-Whitney test) can be used as a test for equality of two population medians.

TRUE

This test for identical populations is a test of medians if variances are equal.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

28. The Wilcoxon rank sum test (Mann-Whitney test) requires two independent samples.

TRUE

Samples must be independent.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

29. The Wilcoxon rank sum test (Mann-Whitney test) can be used even if population variances are unequal.

FALSE

WMW is a test for identical populations, but it is a test for equal medians if variances are equal.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

30. The Wilcoxon rank sum test (Mann-Whitney test) utilizes the ranks of two independent samples.

TRUE

Raw data in each sample are converted into ranks.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

31. The Mann-Whitney test is sometimes called the “Wilcoxon rank sum test” because it was formulated independently by different statisticians.

TRUE

This test has two names.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

32. We sometimes call the Wilcoxon rank sum test the Mann/Whitney test, but the two are the same.

TRUE

This test has two names.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

33. The Mann-Whitney test is analogous to a one-sample t test comparing a mean with a benchmark.

FALSE

The Wilcoxon rank sum test (Mann-Whitney test) compares two populations.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

34. The Kruskal-Wallis test requires c independent samples (where usually c > 2).

TRUE

Kruskal-Wallis compares several populations.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

35. The Kruskal-Wallis test applies even if the c samples to be compared are not independent.

FALSE

Samples must be independent in the Kruskal-Wallis test.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

36. The Kruskal-Wallis test is analogous to the one-sample parametric t test for a mean.

FALSE

Kruskal-Wallis compares several populations.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

37. The Kruskal-Wallis test is analogous to the parametric one-factor ANOVA.

TRUE

Kruskal-Wallis compares c population medians (similar to comparing c means).

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

38. The Kruskal-Wallis test does not require normal populations, but it does require them to be of similar shape.

TRUE

Kruskal-Wallis is a test for identical populations but becomes a test for equal medians if population shapes are the same.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

39. The Kruskal-Wallis test is equivalent to comparing medians in c groups.

TRUE

Kruskal-Wallis is a test for identical populations, but it becomes a test for equal medians if population shapes are the same.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

40. The Kruskal-Wallis test is a test for randomness in sequential data.

FALSE

Kruskal-Wallis compares c population medians. To test for randomness, you would use a runs test rather than a Kruskal-Wallis test.

 

AACSB: Analytical Thinking
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Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

41. The Kruskal-Wallis test is less useful in finance or marketing, because normal populations can usually be assumed in financial or marketing data.

FALSE

Normal populations are rare in many business applications, so the K-W test is useful.

 

AACSB: Analytical Thinking
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Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

42. The Kruskal-Wallis test is almost as powerful as one-factor ANOVA even when normality can be assumed.

TRUE

Studies suggest that the K-W test is about as powerful as the F test (ANOVA).

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

43. The Friedman test is a nonparametric equivalent to two-factor ANOVA without replication.

TRUE

Unreplicated ANOVA data can be tested using the Friedman test.

 

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Difficulty: 2 Medium
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

44. The Friedman test is a nonparametric equivalent to a parametric one-sample t test comparing a mean with a benchmark.

FALSE

The Friedman test is a nonparametric equivalent to two-factor ANOVA without replication.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

45. The Friedman test requires groups of equal size.

TRUE

By definition, there must be one observation per cell.

 

AACSB: Analytical Thinking
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Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

46. The Friedman test compares medians when there are two grouping factors (rows, columns).

TRUE

We can think of the Friedman test as comparing medians if population shape is similar.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

47. The Friedman test resembles the Kruskal-Wallis test except that there are two grouping factors (rows, columns) instead of one grouping factor (columns).

TRUE

The Friedman test is analogous to unreplicated two-factor ANOVA.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

48. The Friedman test is often almost as powerful as two-factor ANOVA without replication (randomized block design).

TRUE

The Friedman test has good power versus two-factor unreplicated ANOVA.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

49. Spearman’s rank correlation always lies within the range -1.00 to +1.00.

TRUE

Spearman’s rho lies between -1 and +1.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

50. Spearman’s rank correlation coefficient lies within the range 0 to 1.00 inclusive.

FALSE

Spearman’s rho lies between -1 and +1.

 

AACSB: Analytical Thinking
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Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

51. Spearman’s rank correlation is named for a British brewer who was testing beer samples.

FALSE

Charles Spearman was a behavioral psychologist.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

52. Spearman’s rank correlation is named for a British behavioral psychologist who was studying human intelligence.

TRUE

Charles Spearman was a behavioral psychologist studying human IQs.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

53. Spearman’s rank correlation is used to measure agreement in rankings of paired (x, y) data.

TRUE

Spearman’s rho is similar in this regard to the usual (Pearson) correlation.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

Multiple Choice Questions

54. All of these are nonparametric tests except:

A. Spearman rank correlation test.

 

B. Friedman test.

 

C. Student’s t test.

 

D. Kruskal-Wallis test.

Student’s t test (Chapter 10) is a parametric test.

 

AACSB: Analytical Thinking
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Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

55. Which nonparametric test is analogous to a parametric two-sample t test for means?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

The Wilcoxon rank sum (Mann-Whitney) test compares medians (assuming that populations have similar shape).

 

AACSB: Analytical Thinking
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

56. Which nonparametric test is analogous to a parametric k-sample test for means?

A. Kruskal-Wallis test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Wald-Wolfowitz one-sample runs test

The K-W test compares medians (assuming populations have similar shape).

 

AACSB: Analytical Thinking
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Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

57. Which nonparametric test is used to compare a one-sample median with a benchmark?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

The Wilcoxon signed-rank test compares a median with a benchmark or target.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

58. Which nonparametric test has no parametric counterpart?

A. Wald-Wolfowitz one-sample runs test

 

B. Spearman rank correlation test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

The runs test is not quite like any parametric test.

 

AACSB: Analytical Thinking
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Difficulty: 3 Hard
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

59. Which nonparametric test is analogous to a parametric one-sample t test for differences in paired data?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

One version of the Wilcoxon signed-rank test is for paired data.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

60. Which nonparametric test would we use to compare ratings assigned to n pairs of bonds by two different rating agencies, if the bonds are rated on an ordinal scale (Aaa, Aa, A, Baa, Ba B, etc.)?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

One version of the Wilcoxon signed-rank test is for paired data.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

61. Which is not true of the one-sample runs test?

A. It is also called the Wald-Wolfowitz test named after its inventors.

 

B. Its purpose is to detect nonrandomness.

 

C. It cannot be applied to sequential observations.

 

D. It is similar to a test for autocorrelation.

The runs test is for randomness in a sequence of two-valued data (e.g., + and -).

 

AACSB: Analytical Thinking
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Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

62. Which nonparametric test is used to detect nonrandomness in sequential observations?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

The runs test is for randomness in a sequence of two-valued data (e.g., + and -).

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

63. Which is a nonparametric test for runs (autocorrelation) in a sequence of binary data?

A. Kruskal-Wallis test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Wald-Wolfowitz one-sample runs test

The runs test is for randomness in a sequence of two-valued data (e.g., + and -).

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

64. Which parametric test resembles the nonparametric Spearman’s rank test?

A. t test of a correlation coefficient

 

B. t test of two sample means

 

C. t test of one sample mean

 

D. F test of variances

The t test of a correlation coefficient can be used to test for zero correlation.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

65. Which nonparametric test is used to test for agreement in ranks of paired data?

A. Spearman test

 

B. Friedman test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

To see if the ranks agree, we could use Spearman’s rho.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

66. Twenty customers are randomly chosen and each is given a sample of Nut Butter ice cream to taste. The customers rank the taste of the ice cream on a 10-point scale. Each is then given a sample of Chewy Gooey ice cream to taste and rank on a 10-point scale. Based on the 20 customers’ ratings of each flavor, the research analyst conducting the survey wishes to determine if one flavor is preferred over the other. Which nonparametric test would you use to determine if there is a difference in the ratings?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

For two independent samples, use the Wilcoxon rank sum test (Mann-Whitney).

 

AACSB: Analytical Thinking
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Difficulty: 3 Hard
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

67. Which is not a characteristic of the Wilcoxon rank sum (Mann-Whitney) test?

A. It can be used as a test for equality of two population medians.

 

B. It is analogous to a one-sample t test comparing a mean with a benchmark.

 

C. It requires independent samples from populations with equal variances.

 

D. It is similar to one-factor ANOVA when we have c independent samples.

The Wilcoxon/Mann-Whitney test uses two samples (not c samples).

 

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Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

68. Delta Air Lines wants to determine if the number of no-shows for flights originating from Detroit is higher than from Minneapolis. A sample of 20 flights from each city is taken and the number of no-shows is determined for each flight. Which nonparametric test would you use to determine whether the number of no-shows is greater in Detroit?

A. Wald-Wolfowitz one-sample runs test

 

B. Wilcoxon signed-rank test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Kruskal-Wallis test

For two independent samples, use the Wilcoxon rank sum test (Mann-Whitney).

 

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Difficulty: 3 Hard
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

69. The dean of Oxnard business school wants to know if there is a difference in computer skills in four majors (marketing, finance, operations, accounting). A 20-question skills test is given to 10 randomly chosen students in each major. Which nonparametric test could be used by the dean to see if there is a difference in computer skills of students in the various majors?

A. Wald-Wolfowitz test

 

B. Wilcoxon signed-rank test

 

C. Mann-Whitney test

 

D. Kruskal-Wallis test

Because we have four samples, we would use the K-W test to compare the medians.

 

AACSB: Analytical Thinking
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Difficulty: 3 Hard
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

70. Which is not a characteristic of the Kruskal-Wallis test?

A. It is analogous to the parametric one-factor ANOVA.

 

B. It does not make any assumptions about the populations.

 

C. It is useful in comparing the medians in c groups.

 

D. It does not require normal distributions of populations.

The K-W test requires populations of similar shape if we want to compare medians.

 

AACSB: Analytical Thinking
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Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

71. Individuals in four different age groups are asked to rate, on a scale of 1 to 10, three flavors of ice creams. Each group has the same number of individuals. Median ratings by the individuals are grouped by the flavor of ice cream and by age group. Which nonparametric test could be used to see if there is a difference in median ratings among the four age groups and three flavors?

A. Wilcoxon signed-rank test

 

B. Friedman test

 

C. Mann-Whitney test

 

D. Kruskal-Wallis test

This is a two-factor comparison using medians, so we would use Friedman’s test.

 

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Difficulty: 3 Hard
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

72. Which nonparametric test is analogous to a two-factor ANOVA without replication?

A. Wilcoxon signed-rank test

 

B. Friedman test

 

C. Mann-Whitney test

 

D. Kruskal-Wallis test

Friedman’s test uses a two-factor experiment with one observed median per cell.

 

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Difficulty: 1 Easy
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

73. If there are three or more populations with ordinal data, what is the appropriate test to determine whether the distributions are equal?

A. Friedman test

 

B. t test

 

C. ANOVA

 

D. Kruskal-Wallis test

K-W is a test for identical populations (or equal medians, if populations differ only in center).

 

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Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

74. Hoping to reduce the waiting time, a doctor’s office tried a new way of scheduling its appointments. Populations of waiting times are believed to be similar except in central tendency. However, waiting times may not be normally distributed, so a nonparametric test was chosen to compare the waiting times. The Wilcoxon/Mann-Whitney test results are shown below:

Which is the best conclusion?

A. The medians differ at α = .01.

 

B. The means differ at α = .01.

 

C. The samples differ at α = .01.

 

D. There are no differences at α = .01.

The p-value is less than .01, so we reject equal medians.

 

AACSB: Analytical Thinking
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Difficulty: 1 Easy
Learning Objective: 16-04 Use the Wilcoxon rank sum test for two samples.
Topic: Wilcoxon Rank Sum Test
 

 

75. At the Food Barn, children can order from the adult menu (A) or the child’s menu (C). Below is the pattern of menu orders for 24 children last Wednesday evening.

A, A, A, A, C, A, A, C, C, C, A, A, A, A, A, A, C, C, C, A, C, C, C, C

Which test would you choose to see if this pattern is random?

A. Kruskal-Wallis test

 

B. Wilcoxon rank sum (Mann-Whitney) test

 

C. Wald-Wolfowitz one-sample runs test

 

D. Wilcoxon test

Use the runs test for sequences that indicate a nonrandom pattern.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

76. At the Food Barn, children can order from the adult menu (A) or the child’s menu (C). Below is the pattern of menu orders for 24 children last Wednesday evening.

A, A, A, A, C, A, A, C, C, C, A, A, A, A, A, A, C, C, C, A, C, C, C, C

Which statement is most accurate?

A. Neither sample size (for outcomes A or C) is large enough for a runs test using z.

 

B. Both sample sizes (for outcomes A and C) are large enough for a runs test using z.

 

C. Only one outcome has a large enough sample for a runs test using z.

 

D. This type of data would not be suited for a runs test using z.

We need 10 outcomes of each type to use a large-sample z test.

 

AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

77. A clinic has four doctors. They wish to compare the amount of time that doctors spend with their patients. It is suspected that times may not be normally distributed but are otherwise assumed similar except in center, so a nonparametric test was chosen. The Kruskal-Wallis test results are shown below.

Which is the best conclusion?

A. The doctors have the same median times at α = .01.

 

B. The doctors have different median times at α = .01.

 

C. The sample size is insufficient for this kind of test.

 

D. A one-factor ANOVA would be a better kind of test.

The p-value is less than .01.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

78. Returns on an investor’s stock portfolio (n = 19 stocks) are compared for the same stock in each of two consecutive quarters. Since the returns are not normally distributed (normality test p-values were .005 and .126 respectively), a nonparametric test was chosen. The test results are shown below.

Which is the best conclusion?

A. The means are the same at α = .01.

 

B. The medians are the same at α = .01.

 

C. The means differ at α = .01.

 

D. The medians differ at α = .01.

The p-value is less than .01.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-03 Use the Wilcoxon signed-rank test.
Topic: Wilcoxon Signed-Rank Test
 

 

79. Returns on an investor’s stock portfolio (n = 19 stocks) are compared for the same stock in each of two consecutive quarters. Since the returns are not normally distributed (normality test p-values were .005 and .126 respectively), a nonparametric test was chosen. The test results are shown below.

Which is the best conclusion?

A. The returns are correlated neither at α = .05 nor at α = .01.

 

B. The returns are correlated at α = .05 but not at α = .01.

 

C. The returns are correlated at α = .01 but not at α = .05.

 

D. The returns are correlated both at α = .05 and at α = .01.

The correlation differs from zero at α = .05 and .01 (close decision).

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-07 Use the Spearman rank correlation test.
Topic: Spearman Rank Correlation Test
 

 

80. Attendees at an outdoor concert can buy pavilion tickets (A) or lawn tickets (B). Below is the output for the one-sample runs to test whether there is a pattern in 32 consecutive ticket purchases.

The best conclusion at α = .05 would be:

A. the pattern is random.

 

B. there is a difference in medians.

 

C. the sample sizes are too small.

 

D. the sample sizes must be equal.

The p-value is greater than .05 so we cannot reject randomness.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-02 Use the one-sample runs test.
Topic: One-Sample Runs Test
 

 

81. To compare the cost of three shipping methods, a firm shipped five orders to each of four different destinations over a six-month period. Their total shipping costs are shown below.

Which nonparametric test would you use to compare the median shipping costs among destinations and among shippers?

A. Friedman test

 

B. Kruskal-Wallis test

 

C. Wilcoxon rank sum (Mann-Whitney) test

 

D. Lebesgue-Stieltjes test

It’s like unreplicated two-factor ANOVA except that data are converted to ranks.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

82. At the Seymour Clinic, the total number of patients seen by three doctors over three days is as follows:

Which nonparametric test would you use to compare the median number of patients seen by the doctors on each day?

A. Wilcoxon test

 

B. Kruskal-Wallis test

 

C. Anderson-Darling test

 

D. Friedman test

Like unreplicated two-factor ANOVA except that data are converted to ranks.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 16-06 Use the Friedman test for related samples.
Topic: Friedman Test for Related Samples
 

 

83. Systolic blood pressure of randomly selected HMO patients was recorded on a particular Wednesday, with the results shown here:

The appropriate hypothesis test to compare the medians is:

A. Wilcoxon test.

 

B. Kruskal-Wallis test.

 

C. Levene’s test.

 

D. Friedman test.

Like one-factor ANOVA except that data are converted to ranks.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 16-05 Use the Kruskal-Wallis test for c independent samples.
Topic: Kruskal-Wallis Test for Independent Samples
 

 

84. You do not wish to assume normality in the population, yet you wish to compare central tendency in c samples. You decide to utilize MegaStat, whose menu is shown here:

Which menu would you choose?

A. Hypothesis Tests

 

B. Nonparametric Tests

 

C. Correlation/Regression

 

D. Analysis of Variance

We would need the Kruskal-Wallis nonparametric test for c medians.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

 

85. You do not wish to assume normality in the population, yet you wish to compare central tendency in c samples. You decide to utilize MINITAB, whose menu is shown here:

Which menu would you choose?

A. ANOVA

 

B. Regression

 

C. Nonparametrics

 

D. EDA

We would need the Kruskal-Wallis nonparametric test for c medians.

 

AACSB: Analytical Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 16-01 Define nonparametric tests and explain when they may be desirable.
Topic: Why Use Nonparametric Tests?
 

Auditing and Assurance Services, 16e (Arens/Elder/Beasley)

Chapter 26   Internal and Governmental Financial Auditing and Operational Auditing

 

26.1   Learning Objective 26-1

 

1) Internal auditors are expected to add value to the organization through improved operational effectiveness. In addition, their responsibilities include all the following except

  1. A) reviewing the reliability and integrity of information.
  2. B) ensuring compliance with the company’s accounting policies.
  3. C) verifying accounting information for external users.
  4. D) ensuring compliance with applicable governmental regulations.

Answer:  C

Terms:  Internal auditors’ responsibilities

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

2) Statements on Internal Auditing Standards are issued by the

  1. A) AICPA.
  2. B) SEC.
  3. C) Internal Auditing Standards Board.
  4. D) Auditing Standards Boards.

Answer:  C

Terms:  Statements on Internal Auditing Standards

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

3) Internal auditors are responsible to

  1. A) the board of directors.
  2. B) management.
  3. C) both A and B.
  4. D) neither A nor B.

Answer:  C

Terms:  Internal auditors’ responsibilities

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

 

4) Which of the following is not a similarity between external and internal auditors?

  1. A) Both must be independent of the company.
  2. B) Both must be competent.
  3. C) Both follow a similar methodology in performing their audits.
  4. D) Both consider risk and materiality deciding the extent of their tests and evaluating results.

Answer:  A

Terms:  Similarities between internal and external auditors

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

5) External auditors would consider internal auditors effective if they

  1. A) are independent of the operating units being evaluated.
  2. B) are competent and well trained.
  3. C) apply a systematic and disciplined approach, including quality control.
  4. D) all of the above.

Answer:  D

Terms:  External auditors; Internal auditors effective

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

6) Which of the following is most correct regarding external auditors use of internal auditors directly on the audit engagement?

  1. A) discourage
  2. B) prohibit
  3. C) require
  4. D) permit

Answer:  D

Terms:  External auditor reliance on internal auditors’ work

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

7) The International Standards for the Professional Practice of Internal Auditing include which two categories of standards?

  1. A) attribute and performance
  2. B) competency and professional skepticism
  3. C) performance and integrity
  4. D) ethics and rules of conduct

Answer:  A

Terms:  International standards; Internal auditing

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

 

8) The professional organization which is responsible for providing guidance for internal auditors is the

  1. A) Association of Private Auditors.
  2. B) Institute of Internal Auditors.
  3. C) American Bar Association.
  4. D) Association of Internal Auditors.

Answer:  B

Terms:  Professional organization responsible for guidance for internal auditors

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

9) External financial statement auditors must obtain evidence regarding what attributes of an internal audit department if the external auditors intend to rely on the internal auditor’s work?

  1. A)
If they have performed relevant audit tests of the internal controls and financial statements Competence
Yes Yes

 

  1. B)
If they have performed relevant audit tests of the internal controls and financial statements Competence
No No

 

  1. C)
If they have performed relevant audit tests of the internal controls and financial statements Competence
Yes No

 

  1. D)
If they have performed relevant audit tests of the internal controls and financial statements Competence
No Yes

 

Answer:  A

Terms:  External auditor reliance on internal auditors’ work

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

 

10) Which of the following is a performance standard under the International Standards for the Professional Practice of Internal Auditing?

  1. A) proficiency and due professional care
  2. B) independence and objectivity
  3. C) requirement that the internal audit must be a CPA
  4. D) engagement planning

Answer:  D

Terms:  International standards; Internal auditing

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

11) The International Standards for the Professional Practice of Auditing list seven performance standards. List three.

Answer:

  1. managing the internal audit activity
  2. nature of work
  3. engagement planning
  4. performing the engagement
  5. communicating results
  6. monitoring progress
  7. communicating the acceptance of risks

Terms:  International Standards for the Professional Practice; Performance standards

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

12) What are three similarities between internal and external auditors?

Answer:

  • Both must be competent as auditors and remain objective in performing their work and reporting their results.
  • Both follow a similar methodology in performing their audits, including planning and performing tests of controls and substantive tests.
  • Both consider risk and materiality in deciding the extent of their tests and evaluating results. However, their decisions about materiality and risks may differ because external users may have different needs than management or the board.

Terms:  Similarities between internal and external auditors

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

 

13) External auditors typically consider internal auditors effective if they meet three criteria. What are these criteria?

Answer:  External auditors typically consider internal auditors effective if they:

  • are independent of the operating units being evaluated
  • are competent and well trained
  • apply a systematic and disciplined approach, including quality control

Terms:  Internal auditors effective if they meet three criteria

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

14) The Institute of Internal Auditors has established Ethical Principles for its members. List each of the principles.

Answer:  The Institute of Internal Auditors’ ethical principles are:

  • integrity
  • objectivity
  • confidentiality
  • competency

Terms:  Institute of Internal Auditors established Ethical Principles

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

15) Independence is a fundamental ethical principle for internal auditors.

Answer:  FALSE

Terms:  Independence; Ethical principle

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

16) Current professional auditing standards prohibit external auditors from using internal auditors for direct assistance on external audits.

Answer:  FALSE

Terms:  Current professional auditing standards

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

17) Internal auditors are expected to provide value to the organization through improved operational effectiveness.

Answer:  TRUE

Terms:  Internal auditors’ responsibilities

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

 

18) The objectives of internal auditors are considerably broader than the objectives of external auditors.

Answer:  TRUE

Terms:  Objectives of internal auditors

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

19) Integrity is one of the Institute of Internal Auditors’ ethical principles.

Answer:  TRUE

Terms:  Integrity; IIA ethical principles

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

20) Internal auditing standards are included in the Blue Book.

Answer:  FALSE

Terms:  Internal auditing standards

Diff:  Easy

Objective:  LO 26-1

AACSB:  Reflective thinking

 

21) Professional guidelines for performing internal audits for companies are not as well-defined as for external audits.

Answer:  TRUE

Terms:  Professional guidelines for internal audits

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

22) The Internal Auditing Standards Board issues Statements on Internal Auditing Standards.

Answer:  TRUE

Terms:  Internal Auditing Standards Board; Statements on Internal Auditing Standards

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

23) Because they spend all their time within one company, internal auditors have much greater knowledge about the company’s operations and internal controls then external auditors.

Answer:  TRUE

Terms:  Internal auditors

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

24) Under the International Standards for the Professional Practice of Internal Auditing, the performance standards deal with the education requirements of the internal auditor.

Answer:  FALSE

Terms:  International Standards for the Professional Practice; Performance standards

Diff:  Moderate

Objective:  LO 26-1

AACSB:  Reflective thinking

 

26.2   Learning Objective 26-2

 

1) The primary source of authoritative literature for doing government audits is the

  1. A) Purple Book.
  2. B) Yellow Book.
  3. C) Green Book.
  4. D) Red Book.

Answer:  B

Terms:  Authoritative literature for doing government audits

Diff:  Easy

Objective:  LO 26-2

AACSB:  Reflective thinking

 

2) When a state or local government agency receives federal funds, it is subject to the audit requirements of

  1. A)
Yellow Book Single Audit Act OMB Circular A-133
Yes Yes No

 

  1. B)
Yellow Book Single Audit Act OMB Circular A-133
No No Yes

 

  1. C)
Yellow Book Single Audit Act OMB Circular A-133
Yes Yes Yes

 

  1. D)
Yellow Book Single Audit Act OMB Circular A-133
Yes No No

 

Answer:  C

Terms:  Local government agency receives federal funds; Audit requirements

Diff:  Easy

Objective:  LO 26-2

AACSB:  Reflective thinking

 

 

3) Which of the following is most correct with regard to the comparison of the financial auditing standards of the Yellow Book with the principles of the AICPA auditing standards?

  1. A) the same as
  2. B) quite different from
  3. C) incompatible with
  4. D) consistent with

Answer:  D

Terms:  Financial auditing standards of Yellow Book; General Auditing Standards

Diff:  Easy

Objective:  LO 26-2

AACSB:  Reflective thinking

4) The correct title of the Yellow Book is

  1. A) Government Auditing Standards.
  2. B) Institute of Internal Auditors (IIA) Practice Standards.
  3. C) Statement of Responsibilities of Internal Auditing.
  4. D) Statement of Standards on Accounting and Review Services.

Answer:  A

Terms:  Yellow Book

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

5) Government Auditing Standards recognize that because of public accountability over governmental activities the acceptable tolerable misstatement as compared to commercial businesses may be

  1. A) equal.
  2. B) lower.
  3. C) higher.
  4. D) indeterminable.

Answer:  B

Terms:  Government auditing standards; Tolerable misstatement

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

6) The Single Audit Act requires that an audit be conducted for recipients who receive total federal funds in any fiscal year of more than

  1. A) $1,000,000.
  2. B) $750,000.
  3. C) $500,000.
  4. D) $100,000.

Answer:  B

Terms:  Single Audit Act

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

7) An audit designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements would be called a(n)

  1. A) performance audit.
  2. B) management audit.
  3. C) operational audit.
  4. D) compliance audit.

Answer:  D

Terms:  Material misstatements from noncompliance with provisions of contracts or grant agreements

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

8) Auditors involved in planning, performing, or reporting on audits under Generally Accepted Government Auditing Standards (GAGAS) must complete ________ hours of continuing professional education in each two-year period.

  1. A) 20
  2. B) 40
  3. C) 60
  4. D) 80

Answer:  D

Terms:  Auditors involved in planning, performing, or reporting on audits under GAGAS

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

9) An audit conducted in accordance with the Yellow Book must include an audit report that states the audit was performed in accordance with

  1. A) Generally Accepted Auditing Standards (GAAS).
  2. B) Generally Accepted Government Auditing Standards (GAGAS).
  3. C) Generally Accepted Standards on Auditing (GASA).
  4. D) Statements on Auditing Standards (SAS).

Answer:  B

Terms:  Yellow Book; Audit report; Audit performed in accordance with

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

 

10) How do the risk and materiality thresholds change in a government audit compared to a financial statement audit of a public company?

Answer:  The Yellow Book recognizes that in government audits the thresholds of acceptable audit risk and materiality may be lower than in an audit of a commercial enterprise. This is because of the sensitivity of government activities and their public accountability.

Terms:  Risk and materiality thresholds change in a government audit

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

11) In addition to an opinion on whether the financial statements are in accordance with GAAP, identify four other reports required by the OMB Circular A-133/2 CFR 200 subpart F.

Answer:  The following reports are required:

  • an opinion as to whether the schedule of federal awards is presented fairly in all material respects in relation to the financial statements as a whole.
  • a report on internal control related to the financial statements and major programs.
  • a report on compliance with laws, regulations, and the provisions of contracts or grant agreements, where noncompliance could have a material effect on the financial statements. This report can be combined with the report on internal control.
  • a schedule of findings and questioned costs.

Terms:  Reports required by OMB Circular A-133

Diff:  Challenging

Objective:  LO 26-2

AACSB:  Reflective thinking

12) The auditing standards of the Yellow Book are consistent with the ten generally accepted auditing standards of the AICPA. There are, however, important additions/modifications in the Yellow Book. For example, the Yellow Book recognizes that materiality and risk are lower due to the nature of the government enterprise. Discuss the other additions/modifications.

Answer:

  • Quality control. CPA firms and other organizations that audit government entities must have an appropriate system of internal quality control and participate in an external quality control review program.
  • Compliance auditing. The audit should be designed to provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a material and direct effect on the financial statements.
  • Reporting. The audit report must state that the audit was made in accordance with generally accepted government auditing standards (GAGAS). The report on financial statements must describe the scope of the auditors’ tests of compliance with laws and regulations and internal controls and present the results of those tests or refer to a separate report that includes the information.

Terms:  Auditing standards of Yellow Book; Additions and modifications to auditing standards of the AICPA

Diff:  Challenging

Objective:  LO 26-2

AACSB:  Reflective thinking

 

13) Government auditing standards are included in the Yellow Book.

Answer:  TRUE

Terms:  Government auditing standards; Yellow Book

Diff:  Easy

Objective:  LO 26-2

AACSB:  Reflective thinking

 

14) The formal name of the Yellow Book is Government Auditing Standards.

Answer:  TRUE

Terms:  Yellow Book; Government Auditing Standards

Diff:  Easy

Objective:  LO 26-2

AACSB:  Reflective thinking

 

15) The Single Audit Act applies only to audits of state and local governments.

Answer:  FALSE

Terms:  Single Audit Act

Diff:  Moderate

Objective:  LO 26-2

AACSB:  Reflective thinking

 

16) Extensive professional development is necessary for auditors doing governmental audits.

Answer:  TRUE

Terms:  Government auditing

Diff:  Easy

Objective:  LO 26-2

AACSB:  Reflective thinking

26.3   Learning Objective 26-3

 

1) Which one of the following is not a major difference between operational and financial auditing?

  1. A) purpose of the audit
  2. B) distribution of the report
  3. C) testing the effectiveness of internal controls
  4. D) inclusion of nonfinancial areas

Answer:  C

Terms:  Operational and financial auditing

Diff:  Easy

Objective:  LO 26-3

AACSB:  Reflective thinking

 

 

2) Which of the following is not one of the major differences between financial and operational auditing?

  1. A) The financial audit is oriented to the past, but an operational audit concerns performance for the future.
  2. B) The financial audit report has widespread distribution, but the operational audit report has limited distribution.
  3. C) Financial audits deal with the information on the financial statements, but operational audits are concerned with the information in the ledgers.
  4. D) Financial audits are limited to matters that directly affect the fairness of the financial statement presentation, but operational audits cover any aspect of efficiency and effectiveness.

Answer:  C

Terms:  Difference between financial and operational auditing

Diff:  Moderate

Objective:  LO 26-3

AACSB:  Reflective thinking

 

3) Which of the following is not a difference between operational auditing and financial auditing?

  1. A) Both must be performed by a CPA.
  2. B) Operational audit reports are usually of a restricted distribution while financial audit reports are widely distributed.
  3. C) Operational audits often cover nonfinancial issues while financial audits do not.
  4. D) None of the above is a difference.

Answer:  A

Terms:  Difference between operational auditing and financial auditing

Diff:  Moderate

Objective:  LO 26-3

AACSB:  Reflective thinking

4) A typical objective of an operational audit is to determine whether an entity’s

  1. A) internal control is adequately operating as designed.
  2. B) financial statements present fairly the results of operations.
  3. C) specific operating units are functioning efficiently and effectively.
  4. D) operational information is in accordance with generally accepted government auditing standards.

Answer:  C

Terms:  Objective of operational audit

Diff:  Moderate

Objective:  LO 26-3

AACSB:  Reflective thinking

 

 

5) Discuss three major differences between operational and financial auditing.

Answer:

  • Purpose of the audit. Financial auditing emphasizes whether historical information was correctly recorded, whereas operational auditing emphasizes effectiveness and efficiency. Financial auditing is oriented to the past, while operational auditing focuses on improving future performance.
  • Distribution of the reports. For financial auditing, the report typically goes to many external users of financial statements, such as stockholders and bankers, whereas operational audit reports are intended primarily for management. The widespread distribution of financial auditing reports requires a well-defined structure and wording. For operational audits, the reports have limited distribution and the reports vary from audit to audit.
  • Inclusion of nonfinancial areas in operational auditing. Operational audits cover any aspect of efficiency and effectiveness in an organization, whereas financial audits are limited to matters that directly affect the fairness of financial statement presentations.

Terms:  Differences between operational and financial audits

Diff:  Moderate

Objective:  LO 26-3

AACSB:  Reflective thinking

 

6) Operational audits are primarily geared towards improving a company’s operational efficiency and effectiveness.

Answer:  TRUE

Terms:  Operational auditing; Effectiveness and efficiency

Diff:  Easy

Objective:  LO 26-3

AACSB:  Reflective thinking

 

7) For financial auditing, the audit report typically goes to many users of financial statements, whereas operational audit reports are intended primarily for management.

Answer:  TRUE

Terms:  Financial audit reports; Operational audit reports

Diff:  Easy

Objective:  LO 26-3

AACSB:  Reflective thinking

26.4   Learning Objective 26-4

 

1) Which of the following groups could be involved in an operational audit?

  1. A) CPA firms
  2. B) internal auditors
  3. C) government auditors
  4. D) All of the above could be involved.

Answer:  D

Terms:  Operational audits

Diff:  Easy

Objective:  LO 26-4

AACSB:  Reflective thinking

 

2) Which of the following statements regarding types of operational audits is likely incorrect?

  1. A) A functional audit has the advantage of permitting specialization by auditors.
  2. B) An advantage of functional auditing is its ability to evaluate interrelated functions.
  3. C) The emphasis in an organizational audit is on how efficiently and effectively functions interact.
  4. D) Special operational auditing assignments arise at the request of management.

Answer:  B

Terms:  Operational audits

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

3) The two most important qualities for an operational auditor are

  1. A) personality and appearance.
  2. B) independence and competence.
  3. C) competence and technical training.
  4. D) academic background and sufficient experience.

Answer:  B

Terms:  Qualities for an operational auditor

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

4) Which of the following can affect the independence of operational auditors?

  1. A)
Responsibilities Reporting Structure
Yes No

 

  1. B)
Responsibilities Reporting Structure
No No

 

  1. C)
Responsibilities Reporting Structure
No Yes

 

  1. D)
Responsibilities Reporting Structure
Yes Yes

 

Answer:  D

Terms:  Affect independence of operational auditors

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

5) Effective internal controls are designed to help organizations achieve which of the following objectives?

  1. A) reliability of financial reporting
  2. B) efficiency and effectiveness of operations
  3. C) compliance with applicable laws and regulations
  4. D) all of the above

Answer:  D

Terms:  Internal control objectives

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

6) Which of the following best describes an audit that emphasizes how efficiently and effectively functions interact?

  1. A) operational
  2. B) compliance
  3. C) financial
  4. D) organizational

Answer:  D

Terms:  Audit that emphasizes how efficiently and effectively functions interact

Diff:  Challenging

Objective:  LO 26-4

AACSB:  Reflective thinking

7) Which of the following is not a purpose of a program audit as performed by government auditors?

  1. A) determination of the extent to which the desired results established by the legislature are being achieved
  2. B) determination of the causes of inefficiencies in sponsored programs
  3. C) determination of the effectiveness of organizations, programs, activities, or functions
  4. D) determination as to whether the entity has complied with laws and regulations applicable to the program

Answer:  B

Terms:  Purpose of program audit performed by government auditors

Diff:  Challenging

Objective:  LO 26-4

AACSB:  Reflective thinking

 

 

8) What distinguishes internal control evaluation and testing for financial and operational auditing?

  1. A) purpose of the work
  2. B) scope of the work
  3. C) both A and B
  4. D) neither A nor B

Answer:  C

Terms:  Internal control evaluation and testing for financial and operational auditing

Diff:  Challenging

Objective:  LO 26-4

AACSB:  Reflective thinking

 

9) ________ is the degree to which the organization’s objectives are accomplished.

  1. A) Effectiveness
  2. B) Efficiency
  3. C) Goal optimization
  4. D) Performance

Answer:  A

Terms:  Operational audit; Activities as represented by functions

Diff:  Challenging

Objective:  LO 26-4

AACSB:  Reflective thinking

 

10) List the three purposes of a program audit.

Answer:  The purposes of a program audit are to determine:

  1. The extent to which the desired results or benefits established by the legislature or other authorizing body are achieved
  2. The effectiveness of organizations, programs, activities, or functions
  3. Whether the entity has complied with laws and regulation applicable to the program

Terms:  Yellow Book; Defines and sets standards for performance audits

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

11) Discuss each of the three broad categories (types) of operational audits.

Answer:

  • Functional. A functional audit deals with auditing one or more functions (e.g., purchasing) in an organization.
  • Organizational. An organizational audit deals with an entire organizational unit, such as a department, branch, or subsidiary. It emphasizes how efficiently and effectively functions interact.
  • Special assignments. Special assignment audits arise at the request of management when there is a need to investigate a particular area, such as investigating the possibility of fraud in a division, determining the cause of an ineffective IT system, or making recommendations for reducing the cost of a manufactured product.

Terms:  Categories of operational audits

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

12) Operational auditing is the review of an organization for efficiency and effectiveness. Discuss what is meant by the terms “effectiveness” and “efficiency.”

Answer:

  • Effectiveness refers to the degree to which the organization’s objectives and goals are accomplished.
  • Efficiency refers to the degree to which costs are reduced without reducing effectiveness.

Terms:  Operational auditing; Effectiveness and efficiency

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

13) Match seven of the terms (a-o) with the descriptions/definitions provided below (1-7):

 

  1. compliance audit
  2. economy and efficiency audit
  3. effectiveness
  4. efficiency
  5. functional audit
  6. Government Auditing Standards
  7. government audit
  8. Institute of Internal Auditors
  9. operational auditing
  10. organizational audit
  11. program audit
  12. Single Audit Act
  13. special assignment
  14. IIA Practice Standards
  15. Statements on Internal Auditing Standards

 

________ 1. the official title of the Yellow Book

 

________ 2. a management request for an operational audit for a specific purpose, such as investigating the possibility of fraud in a division or making recommendations for reducing the cost of a manufactured product

 

________ 3. a government audit to determine whether an entity is acquiring, protecting, and using its resources economically and efficiently and whether the entity has complied with laws and regulations concerning such matters

 

________ 4. the degree to which the organization’s objectives are accomplished

 

________ 5. the review of an organization for efficiency and effectiveness

 

________ 6. federal legislation that provides for a single coordinated audit to satisfy the audit requirements of all federal funding agencies

 

________ 7. statements issued by the Internal Auditing Standards Board of the Institute of Internal Auditors (IIA) to provide authoritative interpretation of the Institute of Internal Auditors’ Practice Standards

Answer:

  1. f, 2. m, 3. b, 4. c, 5. i, 6. l, 7. o

Terms:  Types of audits; Standards

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

14) Effectiveness refers to the degree to which costs are reduced without reducing efficiency.

Answer:  FALSE

Terms:  Effectiveness; Costs reduced without reducing efficiency

Diff:  Easy

Objective:  LO 26-4

AACSB:  Reflective thinking

 

15) Efficiency refers to the degree to which costs are reduced without changing effectiveness.

Answer:  TRUE

Terms:  Efficiency; Costs are reduced without reducing effectiveness.

Diff:  Easy

Objective:  LO 26-4

AACSB:  Reflective thinking

 

16) Effectiveness is concerned with whether defined goals are achieved, whereas efficiency is concerned with whether the goals are achieved with a minimum use of resources.

Answer:  TRUE

Terms:  Effectiveness and efficiency

Diff:  Easy

Objective:  LO 26-4

AACSB:  Reflective thinking

 

17) Operational audits may be performed by internal auditors and government auditors, but not by external auditors.

Answer:  FALSE

Terms:  Operational audits; Internal auditors; Government auditors

Diff:  Easy

Objective:  LO 26-4

AACSB:  Reflective thinking

 

18) The two most important qualities for an operational auditor to possess are independence and competence.

Answer:  TRUE

Terms:  Internal auditors; Independence and competence

Diff:  Easy

Objective:  LO 26-4

AACSB:  Reflective thinking

 

19) Auditors can insist that the changes that they recommend as the result of an operational audit be implemented by the company.

Answer:  FALSE

Terms:  Operational audits

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

 

20) Operational audits are often categorized as functional, organizational, or special assignments.

Answer:  TRUE

Terms:  Operational audits; Functional, organizational or special assignments

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

21) One disadvantage of functional auditing is the failure to evaluate interrelated functions.

Answer:  TRUE

Terms:  Functional auditing

Diff:  Moderate

Objective:  LO 26-4

AACSB:  Reflective thinking

 

26.5   Learning Objective 26-5

 

1) Which of the following is not one of the three phases in an operational audit?

  1. A) planning
  2. B) training and supervising employees
  3. C) evidence accumulation and evaluation
  4. D) reporting and follow-up

Answer:  B

Terms:  Phases of operational audit

Diff:  Easy

Objective:  LO 26-5

AACSB:  Reflective thinking

 

2) When performing an operational audit, the internal audit team must first determine that

  1. A) a financial audit has been performed by an independent auditor.
  2. B) a financial audit has been performed by an internal auditor.
  3. C) a review was performed by either an independent or an internal auditor.
  4. D) specific criteria are developed to define effectiveness.

Answer:  D

Terms:  Operational audits

Diff:  Moderate

Objective:  LO 26-5

AACSB:  Reflective thinking

 

3) As compared to a financial audit, an operational audit:

  1. A)
Requires the auditors to spend more time with the interested parties Makes staffing more complicated
Yes Yes

 

  1. B)
Requires the auditors to spend more time with the interested parties Makes staffing more complicated
No No

 

  1. C)
Requires the auditors to spend more time with the interested parties Makes staffing more complicated
Yes No

 

  1. D)
Requires the auditors to spend more time with the interested parties Makes staffing more complicated
No Yes

 

Answer:  A

Terms:  Operational compared to financial audit

Diff:  Moderate

Objective:  LO 26-5

AACSB:  Reflective thinking

 

 

4) Discuss each of the three phases of an operational audit.

Answer:

  • Planning. In the planning phase, the auditor must determine the scope of the engagement, and communicate it to the organizational unit. It is also necessary to staff the engagement properly, obtain background information about the organizational unit, understand internal control, and decide on the appropriate evidence to accumulate.
  • Evidence accumulation and evaluation. In operational auditing, it is common to use inspection, client inquiry, analytical procedures and observation extensively, while confirmation, reperformance, and recalculation are used less extensively for most operational audits than for financial audits. Operational auditors must accumulate sufficient appropriate evidence to provide a basis for a conclusion about the objectives being tested.
  • Reporting and follow-up. The audit report is tailored to address the scope of the audit, findings, and recommendations and is typically sent only to management, with a copy to the unit being audited. The lack of third-party users reduces the need for standardized wording in operational auditing reports. When recommendations are made to management, follow-up is done to determine whether the recommended changes were made, and if not, why not.

Terms:  Phases of operational audit

Diff:  Moderate

Objective:  LO 26-5

AACSB:  Reflective thinking

5) Benchmarking is one source of evaluation criteria for completing an operational audit.

Answer:  TRUE

Terms:  Benchmarking; Operational audit

Diff:  Easy

Objective:  LO 26-5

AACSB:  Reflective thinking

 

6) Operational auditors must accumulate sufficient appropriate evidence to provide a basis for a conclusion about the objectives being tested.

Answer:  TRUE

Terms:  Operational audits

Diff:  Moderate

Objective:  LO 26-5

AACSB:  Reflective thinking

 

7) An operational auditor may use “engineered standards” as an evaluation criterion.

Answer:  TRUE

Terms:  Operational auditor; Engineered standards

Diff:  Moderate

Objective:  LO 26-5

AACSB:  Reflective thinking

 

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