Auditing A Risk Based Approach to Conducting a Quality Audit 10Th Edition By Johnstone – Test Bank

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Auditing A Risk Based Approach to Conducting a Quality Audit 10Th Edition By Johnstone – Test Bank

chapter 2

1. The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

2. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

3. The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the financial statements are free of material fraud.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   User Expectations of Auditor Responsibility

 

4. Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

5. Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

6. An example of fraudulent financial reporting is the treasurer’s diversion of hundreds of thousands of dollars into a personal money market account.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

7. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it were its subsidiary. BruceCo. has probably committed fraud because of its misapplication of consolidation principles.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

8. Consideration of fraud in financial statement audits is a relatively new concept derived originally from the Sarbanes-Oxley Act.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   User Expectations of Auditor Responsibility

 

9. The most important lesson to be learned from The Great Salad Oil Swindle is that auditors can commit fraud by falsely including inventory that does not exist.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

10. The onslaught of fraud in financial statements over the recent decade has been the first of its kind in history.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   User Expectations of Auditor Responsibility

 

11. The fraud triangle requires the auditor to actively consider and assess the risk of fraud for clients and their financial statements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   User Expectations of Auditor Responsibility

 

12. Fraud detection procedures should only be performed for clients that have had fraud problems in the past.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

13. If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

14. Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for all other engagements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

15. According to professional audit standards, the audit team should assemble early in the planning stages of an audit to conduct a fraud “brainstorming” meeting in order to determine the types of fraud that may occur with the client.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

16. Rationalization is one element of the Fraud Triangle.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-01 – LO: 02-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Defined

 

17. Once the fraud assessment is complete in the planning stage, the auditor need not consider fraud further.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

18. Pressure upon management to manipulate financial information is a common characteristic in fraud cases.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

19. Management compensation that is tied to profits may create incentives to commit fraud.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

20. Management may feel pressure to maintain debt covenants, which is a deterrent to fraud.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

21. Audit procedures to detect fraud are generally an expansion of normal audit procedures.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-03 – LO: 02-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Recent History of Fraudulent Financial Reporting

 

22. Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

23. A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

24. Rationalization involves the mindset of the fraudster to justify committing the fraud.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

25. The auditor should not consider that fraud is present in revenue accounts because revenue is not typically a very complex account.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-03 – LO: 02-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Recent History of Fraudulent Financial Reporting

 

26. Management always uses journal entries to commit fraud because they are not reviewed by auditors.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

27. Auditors must keep a questioning mind when analyzing management responses to inquiry and auditors should strive to obtain corroborating evidence before accepting the management responses.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

28. The auditor must perform a brainstorming session with client management in order to plan the procedures to be performed.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

29. According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

30. One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

31. The audit team should develop its own ideas about how fraud may be performed by the client and then covered up.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Fraud Risk to Audit Procedures

 

32. Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Fraud Risk to Audit Procedures

 

33. When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to the engagement.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Fraud Risk to Audit Procedures

 

34. Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Fraud Risk to Audit Procedures

 

35. When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Fraud Risk to Audit Procedures

 

36. The Sarbanes-Oxley Act significantly enhanced criminal penalties for crimes involving the destruction or alteration of corporate audit records.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

37. During the time period of 1998 to 2007, the median size of public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years).

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

38. According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-The-Counter (OTC) market, rather than those listed on the NYSE or NASDAQ.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

39. Auditors are responsible to fraud even if it has an immaterial effect on the financial statements.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Major Frauds and Audit Procedures

 

40. The landmark Enron fraud in the early 2000’s involved the movement of significant debt off the books to related, unconsolidated entities.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Major Frauds and Audit Procedures

 

41. Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Indicators

 

42. Transparency is a desirable, but not critical, element of effective corporate governance.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

43. The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

44. According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members..

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

45. The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that management is honest.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Audit Procedures and to Fraud Risk

 

46. Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Professional Skepticism

 

47. The objective of financial reporting is to provide useful information to interested users.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Corporate Governance and Auditing

 

48. Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Corporate Governance and Auditing

 

49. The audit committee is a subcommittee of the board of directors comprised of independent outside directors.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Enhanced Role of Audit Committees

 

50. Implementing an effective ethical environment is primarily the responsibility of the audit committee of the Board of Directors.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Required Audit Firm Communication to the Audit Committee
Corporate Governance Responsibilities

 

51. Any major disagreement the auditor has with management should be discussed with the audit committee.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Required Audit Firm Communication to the Audit Committee

 

52. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Corporate Responsibility for Financial Reporting

 

53. An audit must be performed by persons who can make sound judgments relating to complex accounting issues.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Generally Accepted Auditing Standards and IAASB Principles

 

54. The audit committee must be composed of outsiders such as the organization’s attorney and audit partner.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Enhanced Role of Audit Committees

 

55. Management of companies should have the ability to hire and fire the external auditor.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Enhanced Role of Audit Committees

 

56. The audit committee should have the authority to hire and fire the external auditor.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Enhanced Role of Audit Committees

 

57. Formulating corporate strategy and risk management policy is primarily the responsibility of the Board of Directors.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improved Corporate Governance

 

58. Audit committees of publicly traded companies must establish whistleblowing mechanisms within the company.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Required Audit Firm Communication to the Audit Committee

 

59. Why is fraud detection an important part of the audit?

  a. Auditors are required to seek out and find all fraud, regardless of its magnitude.
  b. Auditors expect that management will make them aware of any fraud in the financial statements.
  c. Society expects that financial statements have not been materially misstated due to fraud.
  d. Society realizes that some fraud was not intended to be discovered by auditors.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview

 

60. One of the primary goals of the PCAOB is to restore confidence in which group?

  a. The SEC..
  b. Boards of Directors.
  c. Internal auditors.
  d. Independent auditors..

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-04 – LO: 02-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   An Overview of the Auditor’s Fraud-Related Responsibilities

 

61. Which of the following represents the size of company that has historically committed fraudulent financial reporting or that has experienced asset misappropriation by its employees?

  a. Large corporations.
  b. Middle-market corporations.
  c. Small and start-up companies.
  d. All companies.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Magnitude of Fraud

 

62. What is the primary determinant in the difference between fraud and errors in financial statement reporting?

  a. The materiality of the misstatement.
  b. The intent to deceive.
  c. The level of management involved.
  d. The type of transaction affected.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

63. Which of the following statements reflects an auditor’s responsibility for detecting
fraud?

  a. An auditor is not responsible for discovering fraudulent acts involving employee collusion.
  b. The audit should be planned to detect only fraud caused by departures from GAAP.
  c. An auditor is only responsible for detecting fraudulent financial reporting.
  d. An auditor should design the audit to provide reasonable assurance of detecting
errors and fraud that are material to the financial statements.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

64. Which of the following best represents fraud related to financial reporting?

  a. The transfer agent issues 40,000 shares of the company’s stock to a friend without authorization by the board of directors.
  b. The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts’ expectations this quarter.
  c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.
  d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

65. According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting?

  a. Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter.
  b. Management reclassifies a negative cash balance by decreasing cash and increasing a current liability.
  c. Management discloses its failure to meet loan covenants but states that a waiver has been received.
  d. Management intentionally excludes a subsidiary from its consolidated results that it controls significantly.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

66. What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening?

  a. Skimming.
  b. Ponzi Scheme
  c. Channel Stuffing.
  d. Payroll Fraud.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

67. Which of the following actions was a key element of the Enron audit fraud?

  a. Capitalizing line costs rather than expensing them.
  b. Misrepresenting bribes from suppliers as a reduction of operating costs.
  c. Shifting debt to off-balance sheet special entities.
  d. Concealing large losses related to securities investments.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-03 – LO: 02-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Recent History of Fraudulent Financial Reporting

 

68. Which of the following is a stated principle of a NYSE report identifying key core governance principles?

  a. Members of the Board of Directors should be primarily independent members.
  b. Effective corporate governance should be viewed as a compliance obligation.
  c. Effective corporate governance should be integrated with the company’s business strategy.
  d. The Board of Directors has the primary responsibility for creating a culture of integrity and ethical behavior.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improved Corporate Governance

 

69. Which of the following is a specific corporate governance responsibility of Executive Management?

  a. Approving major changes, such as mergers..
  b. Approving non-audit work performed by the audit firm.
  c. Reviewing the budget of the internal audit function.
  d. Implementing an effective ethical environment.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improved Corporate Governance

 

70. Which of the following is a specific governance responsibility of the Board of Directors of a public corporation?

  a. Managing and reviewing operations.
  b. Approving corporate strategy.
  c. Implementing effective internal controls.
  d. Selecting the external audit firm.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improved Corporate Governance

 

71. Who is most often involved in perpetrating fraudulent financial reporting?

  a. The auditors and the attorneys.
  b. The treasurer and the board of directors.
  c. The chief executive and chief financial officers.
  d. The shareholders and the chief operating officer.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   User Expectations of Auditor Responsibility

 

72. What is the best way an auditor can detect fraud in the financial statements?

  a. Use professional skepticism.
  b. Understand Generally Accepted Accounting Standards.
  c. Brainstorm with the client to find the types of fraud occurring.
  d. Actively search for errors in the financial statements.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

73. How must an auditor address fraud in the planning stage?

  a. The auditor must test for fraud in the planning stage by sampling accounts.
  b. The auditor must consider the likelihood of fraud existing in the company in the planning stage.
  c. The auditor must realize that most people are honest and not automatically assume that fraud exists when planning the audit.
  d. The auditor must not be aggressive in its initial approach to fraud as trust may be lost by the client.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

74. What should an audit team do when it discovers that fraud risk factors are present on an audit engagement?

  a. Retract from the client and inform regulatory bodies.
  b. Modify procedures to actively search for the existence of fraud.
  c. Reduce the amount of evidence required and resort to management inquiry.
  d. Turn the audit over to forensic accountants.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

75. The fraud triangle says three conditions are generally present in the client’s organization when fraud occurs. Which of the following is not one of those conditions?

  a. Incentives.
  b. Professional Skepticism.
  c. Opportunity.
  d. Ability to rationalize fraud.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

76. Which of the following best represents actions that may indicate fraud is pervasive throughout the company under audit?

  a. The company’s management negotiates deals with vendors in such a manner as to pay lower prices.
  b. The company’s management drives luxury vehicles and takes vacations to exotic places.
  c. The company’s management takes an overly aggressive approach to revenue recognition.
  d. The company’s management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Responsibility to Detect Fraud

 

77. Which of the following best describes professional skepticism?

  a. An intent to deceive.
  b. An attitude of intrusion and obstinacy.
  c. A character that does not waver.
  d. A questioning mind.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

78. According to professional audit standards, how might an understanding of the nature of fraud that may occur in the client organization be identified by an audit firm?

  a. Fraud training courses from actual corporate fraud ex-criminals.
  b. Conducting a brainstorming session with the members of the audit team.
  c. Circulating a survey to the client company employees for completion.
  d. Discussions with other audit firms.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

79. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

  a. A high turnover of senior management.
  b. A lack of independent checks.
  c. A strained relationship between management and the predecessor auditor.
  d. An inability to generate cash flow from operations.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

80. The Center for Audit Quality (CAQ) report identifies which of the following ways in which individuals involved in the financial reporting process can mitigate the risk of fraudulent financial reporting?

  a. Individuals involved in financial reporting need to acknowledge that there needs to exist a strong, highly ethical tone at the top of an organization that permeates the corporate culture, including an effective fraud risk management program.
  b. Individuals involved in financial reporting need to continually exercise professional skepticism.
  c. Individuals involved in financial reporting need to remember that strong communication among those involved in the financial reporting process is critical.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

81. Which of the following frauds is most common?

  a. Chief financial officer misappropriation of funds.
  b. Misapplication of revenue recognition principles.
  c. Management’s theft of cash held in reserve accounts.
  d. Over-recording expenses related to stock options.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

82. Which of the following is an example of fraud?

  a. A mistake in processing accounting data.
  b. An incorrect accounting estimate arising from misinterpretation of facts.
  c. Misappropriation of an asset.
  d. A mistake in the application of accounting principles.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

83. Which of the following is a common incentive or condition which increases the likelihood for fraudulent financial reporting?

  a. Ineffective segregation of assets.
  b. Addictions to gambling or drugs.
  c. Pending stock option expirations.
  d. Access to undeposited cash.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-02 – LO: 02-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Fraud Triangle

 

84. Which of the following is not an element of the Fraud Triangle?

  a. Incentive.
  b. Rationalization.
  c. Deception.
  d. Opportunity

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-02 – LO: 02-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Fraud Triangle

 

85. Protection Transparency, Inc. is being audited by Messer and Bromely, LLP. During the assessment of fraud, Messer and Bromely discover that the controller has been creating fictional sales and posting them to the general ledger. Who should the auditors make aware of this issue?

  a. Protection Transparency’s legal counsel.
  b. The police.
  c. The chairman of Protection Transparency’s audit committee.
  d. The predecessor auditor of Protection Transparency.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

86. Management of Premium Discovery Company is compensated through large salaries, stock options and bonuses tied to the company’s working capital growth. The CEO is constantly holding meetings to ensure that management is on target for increased operating income each month. Based upon the above information only, what type of probable motivation is there to commit fraud at the Premium Discovery Company?

  a. Incentive.
  b. Opportunity.
  c. Rationalization.
  d. Expectation.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

87. Which of the following creates an opportunity for fraud to be committed in an organization?

  a. Management demands financial success.
  b. Poor internal control.
  c. Commitments tied to debt covenants.
  d. Management is aggressive in its application of accounting rules.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

88. Which of the following statements about the Bernie Madoff ponzi scheme is false?

  a. Madoff too advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and encourage further investments.
  b. Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley Act, and the provisions of that Act ultimately led to discovery of the fraud.
  c. Madoff was sentenced to 150 years in prison.
  d. The estimated amount missing from client accounts, including fabricated gains, was almost $65 billion.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

89. Sam Jones, controller of Mitnikco, spends three days researching the accounting statements to find loopholes in the “rules” and to make a case for recognizing revenue earlier, rather than in later years. In the end, Sam and the other members of management determine that they will reduce the company’s deferred revenue accounts and begin accounting for all revenues as agreements are signed. What are the motivations of Mitnikco management based solely on the information above?

  a. Pressures.
  b. Opportunity.
  c. Rationalization.
  d. Skepticism.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

90. There are many important reasons for diligent audit planning. If an audit firm wrongly skips the planning stage of an audit, what will be the effect relative to fraud detection?

  a. The firm will not be able to apply GAAP to the financial statements.
  b. The firm will not adequately identify the types of fraud that may occur in the client company.
  c. The firm will not be able to perform direct tests of account balances.
  d. The firm will lack the competency and technical training necessary to complete the audit in accordance with GAAS.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

91. Which of the following statements about fraud or fraud detection is true?

  a. Management may physically alter evidence to perpetrate and conceal the fraud.
  b. Fraudulent financial reporting is generally not material enough to consider.
  c. Journal entries will supply evidence necessary to detect fraud.
  d. The advent of new technology prevents fraud, thereby leading to less fraud over time.

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

92. How did the Sarbanes-Oxley Act strengthen auditor independence?

  a. By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act.
  b. By requiring auditors to report the nature of any auditor-client disagreements to the SEC.
  c. By requiring the lead partner to rotate off the audit engagement at least every five years.
  d. By requiring a different audit firm from the one that performs the audit to prepare the
client’s tax return.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

93. Which of the following frauds involved primarily asset misappropriation?

  a. Enron.
  b. Worldcom.
  c. Dell.
  d. Koss.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify Fraud Risk Indicators

 

94. Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures?

  a. The type of fraud that may occur.
  b. The potential materiality of fraud.
  c. The likelihood of fraud occurring.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Linking Fraud Risk to Audit Procedures

 

95. How frequently does the PCAOB inspect registered accounting firms that audit 100 or more issuers?

  a. Annually
  b. Every two years.
  c. Every three years
  d. Every five years.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

96. The PCAOB has how many board members?

  a. Three
  b. Five
  c. Seven
  d. Nine

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

97. Which of the following is a responsibility of the PCAOB?

  a. To set financial reporting standards for public companies.
  b. To set financial reporting standards for private companies.
  c. To set audit standards for public companies.
  d. To set audit standards for private companies.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

98. How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers?

  a. Annually
  b. Every two years.
  c. Every three years.
  d. Every five years.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

99. According to the Sarbanes-Oxley Act, which of the following items is the independent auditor required to report to the audit committee ?

  a. Materiality limits for audit testing.
  b. Critical accounting policies and practices.
  c. The extent of audit testing in high-risk accounts.
  d. A list of probable fraud errors identified in audit planning.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

100. Which action was a key element in the WorldCom audit fraud case?

  a. Recording bartered exchange transactions as revenue.
  b. Overstating cash by falsely recording cash held at major banks.
  c. Recognizing revenue on the sale of impaired assets.
  d. Concealing large losses related to securities investments.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-03 – LO: 02-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Recent History of Fraudulent Financial Reporting

 

101. Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms for their audit clients would not impair their independence?

  a. Systems design.
  b. Tax services.
  c. Appraisal services.
  d. Internal audit services.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

102. Which of the following items are registered audit firms not required to report to the audit committee?

  a. Critical accounting policies and practices.
  b. Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm.
  c. A list of all audit procedures performed.
  d. Significant written communications between the audit firm and management.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Using Audit Software for Fraud Identification

 

103. Which of the following statements is true concerning the fraud risk model?

  a. Assessing incentive is the first phase of the model.
  b. The fraud risk model should be reviewed with the audit team.
  c. The fraud risk model should be modified based on a review of internal controls.
  d. Auditors do not use a fraud risk model.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-04 – LO: 02-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   An Oveview of the Auditor’s Fraud-Related Responsibilities

 

104. Which of the following is a NYSE mandated guideline for corporate governance?

  a. Boards need to consist entirely of independent directors.
  b. Boards must have an audit committee with a minimum of three independent directors.
  c. Boards must have a compensation committee with a minimum of three independent directors.
  d. CFOs must provide an annual certification of compliance with corporate governance standards.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improved Corporate Governance

 

105. The fraud triangle has three components. Which of the components must be present for a fraud to occur?

  a. All factors must be present for fraud to occur.
  b. All factors need not be present.
  c. Fraud can occur if any one of the factors is present.
  d. None of the above

 

ANSWER:   a
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Indicators of Fraud Risks

 

106. Which of the following best describes how corporate governance influences an organization?

  a. To exert control over management.
  b. To hold management accountable for its actions.
  c. To exert control and require accountability for the resources entrusted to the organization.
  d. To exert control over the internal control environment.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improved Corporate Governance

 

107. Who is responsible for operating an enterprise?

  a. The auditor.
  b. The audit committee.
  c. Management.
  d. The board of directors.

 

ANSWER:   c
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Corporate Governance and Auditing

 

108. Which of the following is not a specific responsibility of an audit committee as mandated by the NYSE?

  a. Discussing the company’s financial statements with the external auditor.
  b. Setting hiring policies for former employees of the external auditor.
  c. Creating and implementing internal controls.
  d. Discussing financial information provided to analysts.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-06 – LO: 02-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Improving Corporate Governance

 

109. Which of following best describes the audit committee’s oversight responsibility?

  a. Provide oversight of reporting outside the organization.
  b. Provide oversight of internal auditing function.
  c. Provide oversight of the external audit.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Enhanced Role of Audit Committees

 

110. Which of the following facts should be communicated by the auditor to the audit committee?

  a. The auditor’s responsibilities under GAAP.
  b. Significant difficulties they had with management during the conduct of the audit..
  c. Significant accounting policies.
  d. All are required communications.

 

ANSWER:   d
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Enhanced Role of Audit Committees

 

111. Which of the following is not one of management’s responsibilities?

  a. Ensuring accounting principles are following in preparing financial statements.
  b. Engaging a qualified auditor.
  c. Implementing effective internal controls.
  d. Ensuring financial statements and disclosures are accurate.

 

ANSWER:   b
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Corporate Responsibility for Financial Reporting

 

112. Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002?

  a. Certify the accuracy of financial statements.
  b. Establish a corporate code of conduct.
  c. Designing internal controls.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.02-05 – LO: 02-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   The Sarbanes-Oxley Act of 2002

 

113. Fraud motivations and factors

Research consistently shows that there are three factors associated with most frauds. List these factors and at least three indicators that the factor may exist for a particular company.

ANSWER:  
Factor   Indicators
Incentives or Pressures   -Management compensation schemes.

-Financial pressure to improve trends.

-Personal need for financial enhancement.

-Compliance with debt covenants.

Opportunities   -Significant related-party transactions.

-Industry dominance.

-Influence over suppliers or customers.

-Volume of subjective judgments by management. regarding valuation and other estimates.

-Simple transactions made complex.

-Complex or difficult to understand transactions (including SPEs/VIEs and derivatives).

-Ineffective monitoring by management.

-Complex or unstable organizational structure.

-Weak or nonexistent internal controls.

Attitudes or Rationalization   -Pushing accounting limits.

-Aggressive accounting stance.

-Audit firm answers to management and not the audit committee.

-Audit firm focus is on consulting for higher fees rather than audit services.

-Stock analyst misguidance.

-“The company owes me!”

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Identify and analyze significant fraud risk factors

 

114. Consideration of fraud in an audit

Auditors are required to actively conduct a financial statement audit with the mindset that fraud may exist. What is the general process that an auditor goes through to assess the risk of fraud and test accordingly?

ANSWER:  
1. Understand the nature of fraud, the motivations to commit fraud, and the manner in which fraud may be perpetrated.
2. Exercise “professional skepticism” throughout the entire fraud risk assessment process.
3. “Brainstorm” and share knowledge with other audit team members.
4. Obtain information useful in identifying and assessing fraud risk.
5. Identify the specific fraud risks, including potential magnitude, and areas likely to be affected by a fraud.
6. Evaluate the quality of the company’s controls and potential effectiveness in mitigating the risk of fraud.
7. Respond, i.e. adjust audit procedures to assure that the audit adequately addresses the risk of fraud and provides evidence specifically related to the possibility of fraud.
8. Evaluate findings. If evidence signals that a fraud might exist, determine whether or not forensic or specialist auditors are needed to complete the investigation.
9. Communicate the possibility that fraud exists to management, or to the audit committee or the full board if the fraud is material and/or involves members of management.
10. Document the audit approach starting with the step 1 through the completion of all of the steps identified above.
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risk Assessment and Detection Procedures

 

115. Fraud consideration by auditors

John Beasley is interviewing with public audit firms to become an auditor. John does not believe that fraud is a “big deal” in client organizations and argues that most individuals in management of companies are “honest people”. He believes that auditors are becoming too cynical.

Describe your response to John’s attitude and discuss the major types of fraud that occur in companies.

ANSWER:   Audit firms have taken criticism for failing to discover material frauds. Auditors have a greater responsibility to plan the audit to consider and detect fraud. This is accomplished partially by the auditor’s use of professional skepticism. Professional skepticism is not necessarily being cynical; rather, it is performing an audit with a questioning mind. It means that the auditors will obtain persuasive evidence to corroborate management responses to inquiries and to increase the sufficiency of substantive audit evidence. Professional skepticism is exhibited in the auditor’s assumption that honesty in people is not a given. Auditors must not only go beyond the evidence in front of them, they must have the mindset of the possibility of fraud in all financial statement engagements.

It must also be mentioned that John’s perspective will likely not be acceptable to the audit firm because his attitude toward fraud is not rigorous enough for the profession.

John must realize that, quite often, fraud in organizations usually takes place in one of three areas:

Asset misappropriation such as theft and misuse of assets.

Fraudulent financial reporting such as the overstatement of certain assets and revenues and the understatement of certain liabilities and expenses.

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

116. PCAOB Independence Standards

What are four requirements of the Sarbanes-Oxley that seek to protect auditor independence?

ANSWER:   Sarbanes-Oxley: Auditor Independence

201 Services outside the scope of practice of auditors. There exist a variety of services that registered audit firms may not perform for issuers, such as bookkeeping, systems design, appraisal services,

and internal auditing, among others. Tax services may be performed, but only with pre-approval by the audit committee.

202 Preapproval requirements. All audit and non-audit services (with certain exceptions based on size and practicality) must be approved by the audit committee of the issuer.

203 Audit partner rotation. The lead partner and reviewing partner must rotate off the issuer engagement at least every five years.

204 Auditor reports to audit committees. Registered audit firms must report to the audit committee issues concerning:

• Critical accounting policies and practices

• Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm

• Significant written communications between the audit firm and management

206 Conflicts of interest. Registered audit firms may not perform audits for an issuer whose CEO, CFO, controller, chief accounting officer, or other equivalent position was employed by the audit firm during the one –year period preceding the audit. This is known as a “cooling off period. ”

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview

 

117. Enron: A Fraud Example

What were the failures that allowed the Enron fraud to occur?

ANSWER:   Weak Management Accountability. Management was virtually not accountable to anyone as long as the company showed dramatic stock increases justified by earnings growth.

Incompetent Corporate Governance. Although the board appeared to be independent, most of the board members had close ties to management of the company through philanthropic organizations.

Accounting Rules. Accounting became more rule-oriented and complex. Accounting allowed practitioners to take obscure pronouncements, such as those dealing with Special Purpose Entities that were designed for leasing transactions, and apply the pronouncement to other entities for which such accounting was never intended.

Enthusiastic Financial Analyst Community. Financial analysts that were riding the bubble of the dot-com economy concluded they did not have tools to appropriately value many of the emerging companies.

Biased Banking and Investment Banking. Many large financial institutions were willing participants in the process because they were rewarded with large underwriting fees for other Enron work.

Lack of an Independent External Auditor. At the time of Enron, the largest five external auditing firms referred to themselves as professional service firms with diverse lines of business. All of the firms had large consulting practices. Arthur Andersen performed internal audit work for Enron, in addition to performing the external audit. The consulting fees of many clients dramatically exceeded the audit fees. Partners were compensated on revenue and profitability. Worse yet, auditors were hired by management who sometimes succeeded in pressuring auditors to acquiesce to aggressive financial reporting preferences.

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Major Frauds and Audit Procedures

 

118. Fraud categories

What are three common ways in which fraudulent financial reporting takes place?

ANSWER:   1. Manipulation, falsification, or alteration of accounting records or supporting documents.

2. Misrepresentation or omission of events, transactions, or other significant information

3. Intentional misapplication of accounting principles

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Types of Frauds

 

119. Audit Committee Responsibilities

Describe the responsibilities of audit committees, and list at least four responsibilities that the NYSE has mandated for audit committees.

ANSWER:   Section 301 of the Sarbanes-Oxley Act outlines the responsibilities of audit committee members for publicly traded companies, stating that audit committees are to be directly responsible for the appointment, compensation, and oversight of the work of registered accounting firms; they must be independent; they must establish “whistleblowing” mechanisms within the company; they must have the authority to engage their own independent counsel; and companies must provide adequate funding for audit committees.

In addition to these broad responsibilities, the NYSE has mandated certain specific responsibilities of audit committees, including:

∙ Obtaining each year a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor

∙ Discussing the company’s financial statements with management and the external auditor

∙ Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts

∙ Discussing in its meetings policies with respect to risk assessment and risk management

∙ Meeting separately with management, internal auditors, and the external auditor on a periodic basis

∙ Reviewing with the external auditor any audit problems or difficulties that they have had with management

∙ Setting clear hiring policies for employees or former employees of the external auditors

∙ Reporting regularly to the board of directors

In addition to these responsibilities, in many companies the audit committee also has the authority to hire and fire the head of the internal audit function, set the budget for the internal audit activity, review the internal audit plan, and discuss all significant internal audit results. Other responsibilities might include performing or supervising special investigations, reviewing policies on sensitive payments, and coordinating periodic reviews of compliance with company policies such as corporate governance policies.

POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Fraud Risks That May Lead to Material Misstatement

 

120. Auditor’s response to fraud risk factors

The auditor assesses the identified fraud risks after taking into account an evaluation of the client’s programs and controls. How might the auditor respond to the results of the assessment of higher fraud risk?

ANSWER:   The auditor should consider:

  -Professional skepticism
    a) Obtain more reliable evidence
    b) Obtain additional corroborating evidence.
  -Assignment of personnel and supervision–specialists or more experienced personnel
  -More careful consideration of management’s selection and application of accounting
  principles
  -Adding an element of unpredictability to auditing procedures

The auditor may change the nature, timing and extent of the audit procedures to be performed by increasing the extent of procedures, making them more persuasive, and moving more of them to the balance sheet date or later.

The response may involve the performance of procedures to further consider the risk related to:

  a) Revenue recognition
  b) Inventory quantities
  c) Management estimates

Responses to consider the risk of management override of controls may include:

  a) Examine journal entries and other adjustments made in preparation of financial statements
  b) Review accounting estimates for biases
  c) Evaluate business rationale for significant unusual transactions
POINTS:   1
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Auditor’s Response to Fraud Risk Factors

 

chapter 8

1. Audit sampling implies the gathering of evidence to use as a basis for making valid inferences about the characteristics of the population as a whole without examining every transaction.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.123 – Objectives of Audit Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

2. Audit sampling is the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.123 – Objectives of Audit Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

3. When performing substantive tests using sampling methods, the auditor’s main concern is the risk of incorrect rejection.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.124 – Risks Associated with Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

4. The risk of incorrect acceptance of an account balance as correct, when in fact it is not correct, bears directly on the effectiveness of an audit.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.124 – Risks Associated with Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

5. The tolerable misstatement is the confidence level needed to infer population values.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

6. Statistical sampling is used when an auditor chooses to examine all purchases of equipment exceeding $1,000.00 and to test the remaining items by analytical procedures.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

7. The most efficient method of testing a large population is the use of non-statistical sampling.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

8. Statistical sampling assists auditors in determining the sufficiency of evidence gathered.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

9. When testing controls, the use of haphazard selection of a sample allows for random, statistical evaluation.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

10. The tolerable failure rate is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances..

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

11. The expected population deviation rate is the auditor’s best estimate of the percentage of transactions processed for which a control is not effectively applied.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

12. An attribute is defined as a characteristic of the population of interest to the auditor.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

13. The sample size decreases as the risk of over-reliance decreases.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

14. For tests of controls, the most commonly used statistical method is attribute sampling.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

15. Increasing the expected failure rate will cause the sample size to increase.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

16. Sample size varies directly with sampling risk.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

17. Statistical sampling used in control testing eliminates the need for evaluation of errors from a qualitative perspective.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-04 – LO: 08-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Attribute Sampling

 

18. The auditor must define the population to which sampling relates if the auditor is to use statistical sampling for substantive tests of account balances.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

19. The individual auditable elements defined by the auditor are the sampling units.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.123 – Objectives of Audit Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

20. The most common statistical approaches for substantive testing are classical variables sampling and MUS.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

21. Non-statistical samples should be based on the same audit considerations as those used for statistical sampling.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

22. Random sampling can be used even if the auditor does not plan on using statistical sampling.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-03 – LO: 08-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Nonstatistical and Statistical Sampling

 

23. Either nonstatistical or statistical sampling is appropriate for substantive tests of details.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-03 – LO: 08-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Nonstatistical and Statistical Sampling

 

24. Monetary unit sampling (MUS) sampling is designed to test whether there is an acceptable risk of account balance understatement.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

25. Monetary unit sampling (MUS) results in an efficient sample size and concentrates on the dollar value of the account balances.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

26. Sample size in a MUS sample is a function of risk of incorrect acceptance, tolerable misstatement, and expected misstatement.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

27. The population for MUS is defined as the number of dollars in the population being tested.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

28. Sampling risk is defined as the risk that an inference drawn from a sample will be incorrect.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.124 – Risks Associated with Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

29. Projected misstatements are developed by extrapolation from the misstatements in sample items to the population.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

30. When evaluating an MUS sample, if the auditor finds no misstatements in the sample, the misstatement projection is zero dollars, and the total estimated misstatement will equal the projected misstatement for items in lower-stratum.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

31. Population items with zero balances have no chance of being selected using PPS sampling.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS

 

32. Population items with a zero balance have the same chance of being chosen as those with dollar balances when using MUS sampling.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

33. Evaluating statistical sample results is one of the tasks that can be performed by GAS.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.129 – Using GAS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

34. The population is a group of items in an account balance that the auditor wants to test.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.123 – Objectives of Audit Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

35. Tolerable misstatement is the maximum amount of misstatement the auditor can accept in the population without requiring an audit adjustment or a qualified audit opinion.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

36. Extracting data from the client’s computer system is one of the tasks that can be performed by GAS.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.129 – Using GAS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

37. Statistical sampling combines the theory of probability and statistical inference with audit judgment and experience.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

38. An example of attribute testing involves obtaining evidence that the client has matched the vendor invoice details with a purchase order and receiving report before payment approval.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

39. A sample which exceeds the tolerable rate of deviation results in the auditor’s reliance on internal control effectiveness.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-04 – LO: 08-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Attributes Sampling

 

40. Attribute sampling for testing controls should only be done by the auditor at the end of the fiscal period under audit.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

41. In analysis of the results of an attribute sampling plan, an auditor may determine that the sample size must be increased.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

42. Random number, systematic sampling and material value sampling are acceptable sample selection methods for statistical sampling.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.130 – Sample Selection Method
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

43. Random number, haphazard selection and block sampling are acceptable sample selection methods for non-statistical sampling.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

44. By using Generalized Audit Software (GAS), the auditor can potentially audit the whole population rather than taking a sample.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.131 – GAS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

45. Using attribute sampling the auditor can test for multiple attributes using the same source documents.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

46. The audit objective of attribute sampling is to test the correctness of an account balance.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

47. Stratification of the population into several homogeneous subpopulations generally creates audit efficiency.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.123 – Objectives of Audit Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

48. In attribute sampling if the upper limit of the possible deviation rate exceeds the tolerable rate the auditor can rely upon the control as being effective.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

49. In MUS sampling basic precision is the upper misstatement limit when no misstatements are detected in a MUS sample. It is computed by multiplying the sampling interval by the error expansion factor.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

50. In attribute sampling if the selected item cannot be located, the auditor should assume that the control procedure was not followed and assess that item as a failure.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

51. Which of the following is not considered when obtaining audit evidence through sampling?

  a. The effectiveness of control procedures.
  b. The efficiency of control procedures.
  c. The dollar accuracy of account balances.
  d. The dollar accuracy of classes of transactions.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.123 – Objectives of Audit Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

52. For which of the following audit procedure would sampling be most appropriate?

  a. Inquiry
  b. Observation
  c. Confirmation
  d. Analytics

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-01 – LO: 08-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Overview of Sampling and GAS

 

53. Which one of the following is not a decision the auditor makes when using attribute sampling?

  a. Sample size.
  b. Selection of items included in the sample.
  c. Evaluation of sample information.
  d. Whether to document all phases.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

54. Which one of the following is a decision the auditor makes when using attribute sampling?

  a. The sampling unit.
  b. Period covered by testing.
  c. Completeness of the population.
  d. All of the above are auditor decisions.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

55. Which of the following is not considered to be non-sampling risk?

  a. Misinterpretation of information.
  b. Use of improper audit procedure.
  c. The sample does not represent the population.
  d. Carelessness of the auditor.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-02 – LO: 08-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Objectives of Sampling and Risks Associated with Sampling

 

56. Which of the following describes sampling risk?

  a. The sample will not contain characteristics representative of the population such that inferences made about that population will be incorrect.
  b. The population will not contain characteristics representative of the sample such that inferences made about that sample will be incorrect.
  c. The auditor incorrectly applies sampling methodology.
  d. The sample size will be larger than needed.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-02 – LO: 08-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Objectives of Sampling and Risks Associated with Sampling

 

57. Which of the following occurs when, based on sample results, control risk is assessed excessively high?

  a. Audit inefficiency.
  b. A less expensive audit.
  c. Reduction of substantive testing.
  d. Errors that are more likely to occur than anticipated.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

58. Concluding that the book value of inventory is correct when it is materially misstated is an example of which of the following risks?

  a. Incorrect rejection.
  b. Incorrect acceptance.
  c. Insufficient sample size.
  d. None of the above.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

59. Incorrect acceptance is directly related to which of the following?

  a. The efficiency of the audit.
  b. The ineffectiveness of the audit.
  c. The cost of the audit.
  d. All of the above.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

60. When performing sampling, the auditor is most concerned with which of the following?

  a. Risk of incorrect rejection.
  b. Risk of incorrect acceptance.
  c. Risk of excess sample size.
  d. Risk of errors in the population.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

61. While auditors may use either statistical or non-statistical sampling, some auditors restrict the use of non-statistical sampling for what reason?

  a. It is less effective.
  b. It is less objective.
  c. It is less efficient.
  d. It is less risky.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

62. Which of the following applications are incorporated into statistical sampling?

  a. Binomial and confidence intervals.
  b. Random and haphazard selection.
  c. Hypergeometric distribution with audit risk.
  d. Probability and statistical inference with audit judgment.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

63. Which one of the following issues need not be addressed when planning an audit sample to test control procedures?

  a. Audit objective of the test.
  b. Minimum failure rate.
  c. Expected population deviation rate.
  d. Auditor’s allowable risk of assessing control risk too low.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

64. Which of the following is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances?

  a. Tolerable failure rate.
  b. Allowable risk of assessing control risk too low.
  c. Expected failure rate.
  d. Allowance for sampling error.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

65. Which of the following statistical sampling methods is most commonly used to test control procedures?

  a. Variable sampling.
  b. Ratio estimation sampling.
  c. Attribute sampling.
  d. Dollar unit sampling.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

66. Which one of the following is not a typical step used to implement an attribute sampling plan?

  a. Define the attributes of interest and what constitutes failure(s).
  b. Select and test the sample items.
  c. Evaluate the sample results.
  d. Define the non-statistical sampling method that is most effective and efficient.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

67. When performing attribute sampling, which of the following varies directly with the sample size?

  a. The expected failure rate.
  b. The tolerable failure rate.
  c. The risk of overreliance.
  d. The nonsampling risk.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

68. In analyzing misstatements using sampling techniques, the auditor should analyze the misstatements in what manners?

  a. Qualitatively and quantitatively.
  b. Absolutely and proportionately.
  c. Haphazardly and randomly.
  d. Methodically and systematically.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

69. In testing account balances, haphazard sampling is an acceptable method of sampling provided the auditor believes the sample to be which of the following?

  a. Statistically sound.
  b. Representative of the population.
  c. Representative of the sample.
  d. In the upper stratum.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

70. When determining sampling size in attribute sampling, which of the following is usually true?

  a. Sampling risk will be too high.
  b. Tolerable misstatement amount is determined.
  c. A failure rate is not to be expected.
  d. Population size is not a major factor.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-04 – LO: 08-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Attributes Sampling

 

71. Which of the following is not an item the auditor needs to determine in designing sampling for substantive testing?

  a. The audit objective.
  b. The method of selecting a sample.
  c. Expected misstatement conditions.
  d. Expected deviation rate.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-05 – LO: 08-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Using Sampling to Gather Evidence about Misstatements in Account Balances

 

72. Which of the following is a method of reducing non-sampling risk?

  a. Proper supervision and instruction of the client’s employees.
  b. Proper supervision and instruction of the audit team.
  c. The use of attributes sampling rather than variables sampling.
  d. Controls to ensure that the sample drawn is random and representative.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-02 – LO: 08-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Objectives of Sampling and Risks Associated with Sampling

 

73. Which of the following is a factor that the auditor should consider when choosing between non-statistical and statistical sampling?

  a. Whether the audit staff is adequately trained to use statistical sampling.
  b. Whether the population lends itself to a random-based selection method.
  c. Whether the auditor wants a statistical measure of the risk of drawing a wrong conclusion.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

74. When confirming receivables in testing for overstatements, assume that there are few or no misstatements expected and the selection will be based on the dollar value of individual items. Which of the following is the auditor most likely to use?

  a. MUS sampling.
  b. Stratified mean-per-unit sampling.
  c. Ratio estimation sampling.
  d. Attribute sampling.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

75. The results of MUS sampling will be unacceptable when the total estimated misstatement exceeds which of the following?

  a. The tolerable error rate.
  b. The tolerable misstatement amount.
  c. The expected deviation rate.
  d. The expected deviation amount.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-06 – LO: 08-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Monetary Unit Sampling

 

76. MUS is based on which of following?

  a. Attributes estimation sampling.
  b. Classical variables sampling.
  c. Population variability sampling.
  d. Expected error sampling.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-06 – LO: 08-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Monetary Unit Sampling

 

77. MUS is designed to test for which of the following?

  a. Overstatements.
  b. Understatements.
  c. Neither understatements nor overstatements.
  d. Either understatements or overstatements.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

78. Which of the following does the design of a MUS sample not require the auditor to determine?

  a. Risk of incorrect acceptance.
  b. Inherent risk.
  c. Ratio of expected misstatement to tolerable misstatement.
  d. Ratio of tolerable misstatement to the total population value.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

79. When using MUS, an auditor found that the sampling interval should be $15,755. If selecting the sample manually, the auditor should round the sample interval to which of the following amounts?

  a. $16,000.
  b. $15,000.
  c. $14,000.
  d. $10,000.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

80. When planning a test of details using MUS sampling, tolerable misstatement is usually set at what level?

  a. Higher than performance materiality.
  b. Lower than performance materiality
  c. Higher than the expected error amount.
  d. Lower than the expected error amount.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-06 – LO: 08-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Monetary Unit Sampling

 

81. In MUS, what is meant by a sampling interval of 900?

  a. Every 900th item will be selected.
  b. Every 900th dollar will be selected.
  c. Expected misstatement is 900.
  d. Tolerable misstatement is 900.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-06 – LO: 08-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Monetary Unit Sampling

 

82. In using MUS, once the auditor has determined the sample size, which of the following is needed to determine the sampling interval?

  a. Expected misstatement.
  b. Tolerable misstatement.
  c. Population size.
  d. Mean.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-06 – LO: 08-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Monetary Unit Sampling

 

83. Which one of the following is a proper course of action for the auditor when the total estimated misstatement exceeds the tolerable misstatement?

  a. The auditor can ask the client to correct the known misstatements.
  b. The auditor will analyze the detected misstatements for some common problems.
  c. The auditor can expand the sample.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

84. MUS sampling has all of the following advantages over other statistical methods except which of the following?

  a. Easier to apply than other statistical sampling approaches.
  b. Sample sizes are relatively small.
  c. It is a relatively easy way to make sure that negative balances and zero balances are included in the sample.
  d. Usually results in a highly efficient sample size.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

85. Which of the following is a major disadvantage of MUS sampling?

  a. Sample selection is relatively easy.
  b. Sample sizes are relatively small.
  c. It is easy way to test for understatement.
  d. It directly controls for the risk of incorrect acceptance.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

86. That auditor will do which of the following when the results of sample testing conclude that there is misstatement in excess of the tolerable misstatement?

  a. Issue a disclaimer of opinion.
  b. Throw out the sample.
  c. Propose adjustments to the client.
  d. Disclose the misstatement in the client’s financial statements.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

87. Which of the following is not a type of statistical method that provides results in dollar terms?

  a. Variables sampling.
  b. Attributes sampling.
  c. Monetary unit sampling.
  d. Probability proportional to size sampling.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.132 – Objectives of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

88. When an auditor uses MUS and analyzes misstatements in the lower stratum, which of the following will be multiplied by the sampling interval to calculate the projected misstatement for each misstated item?

  a. Audit value.
  b. Tolerable misstatement.
  c. Sampling interval.
  d. Tainting percentage.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

89. In attribute sampling, which of the following does the risk of incorrect acceptance deal with?

  a. Effectiveness.
  b. Efficiency.
  c. Reliability.
  d. Both A and B.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

90. In attribute sampling, the risk of incorrect rejection deals with which of the following?

  a. Effectiveness.
  b. Efficiency.
  c. Reliability.
  d. Both A and B.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

91. Which of the following is a factor of nonsampling risk?

  a. Not carrying out the appropriate audit procedure.
  b. Having a sample which does not represent the population.
  c. Using a random sample selection
  d. Using non-statistical sampling

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.08-02 – LO: 08-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
TOPICS:   Objectives of Sampling and Risks Associated with Sampling

 

92. Attribute sampling is used in which of the following situations?

  a. Testing rates of deviations of controls.
  b. Testing the reasonableness of account balances.
  c. Need to estimate some amount.
  d. Both A and B.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

93. In selecting a sample for attribute testing, systematic selection involves which of the following approaches?

  a. Each item in the population having an equal chance of selection.
  b. Every nth item being selected after a random start.
  c. An arbitrary selection with no conscious bias.
  d. Selecting all items on a day or week.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

94. In selecting a sample for attribute testing, haphazard selection involves which of the following approaches?

  a. Each item in the population having an equal chance of selection.
  b. Every nth item being selected after a random start.
  c. An arbitrary selection with no conscious bias.
  d. Selecting all items on a day or week.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

95. In selecting a sample for attribute testing, block sampling involves which of the following approaches?

  a. Each item in the population having an equal chance of selection.
  b. Every nth item being selected after a random start.
  c. An arbitrary selection with no conscious bias.
  d. Selecting all items on a day or week.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

96. Sampling risk deals with which of the following?

  a. Not carrying out the appropriate audit procedure.
  b. Drawing an incorrect inference from the sample results.
  c. Inappropriately diagnosing client’s problems.
  d. Both A and C.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

97. Which of the following are limitations of using the MUS sampling method?

  a. MUS is not very useful in testing for understatement.
  b. MUS is not very useful in testing for zero and negative amounts.
  c. N MUS is not very useful in testing if the auditor expects numerous misstatements.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

98. In testing the reasonableness of an account balance, if MUS sampling cannot be used because of its limitations, what is an alternative statistical method?

  a. Attribute sampling.
  b. Classical variables sampling.
  c. Discovery sampling.
  d. All of the above.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

99. When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process using which of the following components?

  a. Basic Precision.
  b. Projected misstatement for items in lower-stratum.
  c. Incremental Allowance for Sampling Error.
  d. All of the above.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

100. Which of the following task is not performed by generalized audit software?

  a. Footing a file.
  b. Obtaining file statistics.
  c. Checking for gaps in processing sequences.
  d. Preparing custom reports.
  e. All of the above tasks can be performed using GAS.

 

ANSWER:   e
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.129 – Using GAS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

101. Dividing the population into relatively homogeneous groups in order to reduce sample size is the definition of which of the following terms?

  a. Ratio estimation.
  b. Difference estimation.
  c. Stratification.
  d. MUS sampling.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.132 – Objectives of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking

 

102. Sampling factors

List the four important decisions an auditor must make when deciding to use sampling.

ANSWER:   When deciding to use sampling techniques the auditor must decide the following:

Population – Which population should be tested and for what characteristics?
Sample size – How many items should be selected for audit testing?
Selection – Which items should be included in the sample?
Evaluation – What inferences can be made about the overall population from the sample?
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.132 – Objectives of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

103. Nonsampling risk

What is nonsampling risk and how can it be eliminated?

ANSWER:   Nonsampling risk includes all aspects of audit risk that are not due to sampling. Nonsampling risk would include using auditors who are not properly trained, inadequate supervision, use of an improper or incorrect audit procedure, or the misinterpretation of information. Nonsampling risk cannot be eliminated on an audit, but it can be guarded against. Implementation of good quality- control practices, carefully designed audit programs, and assignment of qualified personnel to each audit will help minimize nonsampling risk.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

104. Risks of sampling in tests of controls

Define the following terms as they relate to sampling for tests of controls:

1. tolerable failure rate
2. expected failure rate
   

 

ANSWER:   Tolerable failure rate is the level at which the control’s failure to operate would cause the auditor to conclude that the control is not effective and would likely change the auditor’s planned assessment of control risk in performing tests of account balances

Expected failure rate is an anticipation of the deviation rate in the entire population.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

105. Planning and documentation of an attribute sampling plan

What are the steps to implement an attribute sampling plan?

ANSWER:   The auditor should include the following in his or her working papers for adequate documentation involving sampling:

1. Define the attributes of interest and what constitutes failure(s).

2. Define the population from which the sample is to be taken.

3. Determine the sample size.

4. Determine the method of selecting the sample.

5. Select the sample items and perform the test of control.

6. Evaluate the sample results and consider the effect on planned substantive procedures.

7. Document all phases of the sampling process.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.127 – Attribute Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

106. Evaluating misstatements when using sampling to test account balances

Explain the term “misstatement” as it applies to sampling during substantive procedures and explain how the term may be interpreted differently by different auditors.

ANSWER:   A misstatement is an error, either intentional or unintentional, that exists in a transaction or financial statement account balance. When sampling for substantive tests of details, a misstatement involves differences between recorded values and audited values.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

107. Choosing sampling methods

Identify the factors that an auditor would consider when choosing between non-statistical sampling and statistical sampling.

ANSWER:   When choosing between statistical and non-statistical sampling the auditor would consider:

Whether the audit staff is adequately trained to properly use statistical sampling.
Whether the added costs of designing, selecting, and evaluating a statistical sample are justifiable in the circumstances.
Whether the auditor wants an objective measure of the risk of drawing a wrong conclusion based on the sample.
Whether the population lends itself to a random-based selection method.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.126 – Non-statistical vs. Statistical Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

108. Using MUS sampling

Describe MUS sampling and identify the conditions that would cause an auditor choose to use MUS sampling.

ANSWER:   MUS sampling is an adaptation of attribute sampling methods to dollar value testing. It was developed specifically for use in auditing. MUS sampling is most effective when testing for overstatements in situations when few misstatements are expected. Individual book values must be available for testing. The population for MUS sampling is defined as the number of dollars in the account balance being tested. Each dollar in the population has an equal chance of being chosen, but each dollar is associated with a particular item such as an inventory item.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

109. Sampling and non-sampling risk

Discuss what is meant by “sampling risk” and “nonsampling risk”.

ANSWER:   Sampling risk occurs when the sample is not representative of the population; that is, the characteristics of interest in the sample are not the same as those in the population. Sampling risk is the risk that the auditor’s conclusion based on a sample might be different from the conclusion that would be reached if the audit procedure were applied in the same way to the entire population.

The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling risk is referred to as nonsampling risk. Nonsampling risk occurs when audit tests do not uncover existing exceptions in the sample. Nonsampling risk could also be due to a lack of knowledge of the auditor performing the audit procedure.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.pling – Risks of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

110. Application of MUS

Explain why monetary unit sampling is not useful for detecting understatements

ANSWER:   Monetary unit sampling is a technique that assigns physical units to an item in the population based on the dollar value of the item. Larger dollar items are more likely to be chosen for the sample than smaller items. So, if a client has understated an item there is less likelihood that the item will be selected. Consequently, auditors do not commonly use MUS when they are concerned with understatements.
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

111. Advantages of MUS sampling

Discuss the advantages of monetary unit sampling over other sampling methods.

ANSWER:   ∙ MUS is generally easier to apply than other statistical sampling approaches.

∙ MUS automatically selects a sample in proportion to an item’s dollar amount, thus providing automatic stratification of the sample.

∙ If the auditor expects (and finds) no misstatements, MUS usually results in a highly efficient sample size.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

112. Upper Misstatement Limit

When evaluating the MUS sample results, the auditor calculates the total estimated misstatement in the account balance based on the sampling process. Describe the four components that make up this total.

ANSWER:   The total estimated misstatement is computed by adding together three components:

Factual misstatement for items in the top-stratum.

Basic Precision – The amount of uncertainty associated with testing only a part of the population (sampling error). It is equal to the UML if no errors are found in the sample.

Most Likely Misstatement (MLM) – The best estimate of the actual amount of dollar misstatements that exist in the account balance. This is also called projected misstatement.

Incremental Allowance for Sampling Error – An increase in the upper misstatement estimate caused by the statistical properties of misstatements found.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.128 – MUS
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

113. Sample selection

Before procedures using statistical or non-statistical sampling methods begin, the auditor must determine how the sample will be selected. Discuss the various types of sample selection, when they are used and, generally, how they are used. Give examples.

ANSWER:   Random number selection

Random number selection is an efficient use of sample selection if random numbers can be related to the population. An example of this is in sampling customer invoices that are sequentially numbered. The sequence can be used as the range for random number selection. Random selection is known to be representative of the population and is required for statistical sampling methods.

Systematic selection

Systematic selection is also a random technique and is acceptable for statistical methods. It is used when sequential numbering is not used in the population or is difficult to use for sampling. An example of this is in sampling inventory for valuation. If the database table keeps inventory items by a unique product number that has alphanumeric characters, then the product number can be used with systematic selection. However, in order to use systematic selection the auditor must (a) establish that the population is complete, and (b) be sure that there is not a systematic pattern in the population. An interval must be used to sample every nth item in the population. Every item in the population then has an equal chance of being selected.

Haphazard selection

Items may be arbitrarily selected from the population using no conscious basis. This haphazard selection process is not considered random and is not used in statistical methods.

Block sampling

Similar to haphazard selection, the auditor may wish to select all transaction in a given day or week. This selection process may not give the auditor the representation of the transactions as they occurred for a more extended period of time.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.132 – Objectives of Sampling
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

114. Non-statistical sampling

Describe non-statistical sampling for test of account balances and how it is used by the auditor.

ANSWER:   Nonstatistical samples should be based on the same audit considerations as those used for statistical sampling. There is no way to mathematically control for and measure sampling risk in a nonstatistical sample; the auditor can project only the detected misstatements and make a judgment as to whether the account is likely to be materially misstated, and then decide whether more audit work is needed.

In determining sample size, all significant items should be tested. The auditor should select all items over a specific dollar amount, and then, depending on audit objectives, select items with other characteristics, such as items billed in the last week or billed to specific parties. The sample size of the other items to be tested should be based on the same factors used in statistical sampling. In terms of selecting the sample, the auditor should take steps to increase the likelihood that the sample is representative of the population. The auditor may obtain a representative sample using a random based method or haphazard sampling.

The auditor then has to evaluate the sample results. While statistical sampling methods automatically builds in an allowance for sampling risk given the defined parameters provided by the auditor, now the auditor has to judgmentally consider that allowance.

For example, using the example provided in the text, a misstatement of $900 out of a sample of $310,000 given a population of $2,500,000 results in a projected error of $7,258.

$900/$310,000 × $2,500,000 = $7,258

If tolerable misstatement is $8,000, even though the projected misstatement is less than tolerable misstatement the auditor may still reject the account balance as being materially misstated. However, if tolerable misstatement is $15,000 then the auditor may very well be willing to accept the account balance as not being materially misstated. The point is that now the auditor has to judgmentally evaluate the point at which he would be satisfied to sign off on the appropriateness of the account balance.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.125 – Using Sampling to Test Account Balances and Assertions
STATE STANDARDS:   United States – AK – AACSB-Analytical skills
United States – AK – AACSB-Communication skills
United States – AK – AICPA BB-Critical thinking

 

chapter 16

1. The significant judgments of “Assets of Held-for-Sale Operations” are subject to impairment testing based on the most likely sale or disposal price.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

2. Complex audit judgments and decisions often involve accounts that require subjective estimates by management.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

3. The inventory account does not require any subjective estimates by management.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

4. Auditors are not responsible for making judgments regarding the fair value of securities.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

5. Auditors are constantly challenged to evaluate the quality of a client’s estimates, including areas such as obsolescence of inventory, allowance for doubtful accounts, and tax provisions among others.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

6. Auditor needs to assess disclosures about what lines of business the company may discontinue.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

7. There are systematic processes that the auditor can use in making most of the complex judgments in the financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

8. The significant judgments related to “net finance receivables” include assessing the allowance for noncollectibility.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

9. The significant judgments related to “deferred income taxes” are subject to estimates of future profitable operations against which the deferred asset might be utilized.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

10. Existing professional guidance notes that auditors must make materiality assessments for purposes of (1) audit planning and (2) evidence evaluation after audit procedures are completed.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

11. An auditor’s consideration of materiality is a matter of professional judgment and is influenced by the auditor’s perception of the needs of users of financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

12. Materiality judgments are made in light of the surrounding circumstances, but need not necessarily involve both quantitative and qualitative considerations.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

13. The purpose of making materiality judgments is to make sure that financial statements are free of any material misstatement.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

14. The auditor considers materiality only at the overall financial statement level.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

15. Auditors make materiality assessments to help in planning the audit evidence to obtain and in evaluating the audit evidence that was obtained.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

16. Determining materiality is based solely on quantitative factors.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

17. If the auditor believes that misstatements aggregating approximately $50,000 would be material to the income statement, but misstatements aggregating approximately $100,000 would be material to the balance sheet, the auditor typically assesses overall materiality at $100,000 or less.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

18. Planning materiality helps the auditor determine the extent of audit evidence needed in order to provide an opinion on the financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

19. In performing substantive analytical procedures, the threshold for determining whether differences between the client’s recorded balance and the auditor’s expectation should be based on planning materiality.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

20. If a company’s net income varies significantly from year to year, the auditor might consider using an average of the net income from the prior three to five years as the materiality benchmark.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

21. The accumulation of which potential misstatements to accumulate for the purpose of assessing the materiality of misstatements is often based on whether items are considered clearly trivial.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

22. A materiality level where the auditor believes that the errors below that level would not, even when aggregated with all other misstatements, be material to the financial statements is often based on whether something is considered clearly trivial.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

23. Auditors may consider only quantitative effects and not qualitative effects in making materiality judgments.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

24. Misstatements detected during the audit that were initially deemed to be immaterial need not be summarized to determine their aggregate effects.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

25. The auditor need not inform the audit committee about adjustments arising from the audit that were considered to be material.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

26. The assessment as to whether a misstatement in a cash-flow classification is material should be primarily based on an income statement perspective.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

27. Auditors request the client to book all known misstatements, even if the recording cost is very high so that there are no carryovers from year to year.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

28. The SEC’s position is generally that if management refuses to correct a material misstatement, then the auditor is obligated to issue a qualified or an adverse opinion on the financial statements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

29. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the effectiveness of the client’s internal control over financial reporting.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

30. The iron curtain method for assessing materiality focuses on assuring that the year-end balance sheet is correct and considers the impact of prior-year uncorrected misstatements reversing in later years.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

31. The SEC issued SAB 108 in 2006, which mandates what is termed a dual approach to assessing uncorrected misstatements.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

32. A misstatement that is intentional is not assessed any differently by the auditor than a misstatement that is unintentional.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

33. When evaluating identified misstatements, the auditor only needs to consider misstatements in the current year, and not misstatements from the prior year.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

34. Auditors can choose to test the client’s warranty reserves using primarily tests of controls and substantive analytical procedures.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

35. When auditing pension obligations, the auditor will likely use a specialist to assist the audit team.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

36. Goodwill is the excess of the purchase price over the fair market value of the acquired company’s tangible assets, identifiable intangible assets, and liabilities.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

37. Because of conservatism considerations, auditors should allow a client to overestimate its reserve for restructuring.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

38. Goodwill has to be evaluated for impairment once a year, as well as on an interim basis as the time events and circumstances warrant.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

39. If the market value of the reporting unit is below book value and a significant amount of goodwill exists, the presumption is that there has been an impairment of goodwill.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

40. Goodwill arising from many acquisitions can be netted into one test at the company level.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

41. If restructuring charges are not calculated correctly, the charges can be used to fraudulently manipulate income.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

42. In assessing the fair value of Level 1 assets, the auditor can perform an analysis of the volume of trading activity as part of obtaining audit evidence.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

43. When assessing fair value of Level 2 assets, auditors will use information on the sale of identical items in active or inactive markets as a source of audit evidence.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

44. Level 1 assets is a broad category of assets and applies to financial instruments, property, or lower of cost or market considerations for inventory, loans, or receivables.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

45. Audits of Level 3 assets are the most straightforward as they involve an observable, active market.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

46. Assuming that other assets have been properly valued, if the market value of the reporting unit is equal to the carrying value of the assets of the reporting unit, the presumption is that goodwill has been impaired.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

47. Current FMV of assets and liabilities of non-goodwill assets is one of the factors affecting goodwill impairment valuations.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

48. A sensitivity analysis of changes in value based on industry and cash-flow assumptions is one of the aspects of the audit program for goodwill impairment testing.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

49. While performing goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, the approach would be to determine whether all other assets have been adjusted to fair value, where applicable.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

50. U.S. accounting standards require organizations to use a two-step process to determine the impairment of goodwill.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

51. An audit of Level 1 assets is likely to be less challenging than an audit of Level 3 assets.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

52. When there is a ready market for financial instruments, the audit procedures related to valuation and disclosures are more straightforward than when the instrument is not readily marketable.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-07 – LO: 16-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit considerations for financial instruments

 

53. When auditing financial hedges, the auditor should understand the product, identify relevant risks and controls, and understand the appropriate accounting.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-07 – LO: 16-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit considerations for financial instruments

 

54. The significant judgments related to debt depend on specific accounting rules (U.S. or international) that the company is following.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-07 – LO: 16-07
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit considerations for financial instruments

 

55. The volume of transactions affected is one of the critical criteria in assessing identified internal control deficiencies.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

56. Evidence of fraud, whether or not material, on the part of senior management, would likely cause the auditor to conclude that the client had a material weakness in internal control over financial reporting.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

57. A compensating control would not be considered as a factor that could mitigate a potential material weakness.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

58. In the U.S. a CPA firm can provide both internal and external audit services for the same public company client.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

59. Independence of the internal audit function is obtained by giving the Chief Audit Executive (CAE) unrestricted access to the board and senior management.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

60. Internal auditors can perform both consulting services and assurance services.

  a. True
  b. False

 

ANSWER:   True
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

61. All internal auditors are required to have the CIA designation in order to practice internal auditing.

  a. True
  b. False

 

ANSWER:   False
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

62. Which of the following is subject to fair value assessment?

  a. Marketable securities.
  b. Inventory.
  c. Property that will be sold.
  d. All of the above could require fair value adjustments.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

63. Which of the following is least likely to require significant auditor judgment about the dollar amount to be disclosed in the financial statement?

  a. Contingent liability related to pending litigation.
  b. Assumptions made in preparation of the estimate of income tax expense for the year.
  c. The value of inventory.
  d. Cash on hand at the end of the year.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

64. Which of the following statements best describe an issue related to inventory?

  a. Impairment testing based on most likely sale or disposal price.
  b. Subject to allowance for noncollectibility.
  c. Lower of cost or market impairments, including an allowance for obsolescence.
  d. Subject to estimates made regarding the expected life of the assets and the appropriateness of the depreciation method.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

65. Which of the following best describes the nature of assets of held-for-sale operations?

  a. Impairment testing based on most likely sale or disposal price.
  b. Impairment testing if plants are closed or equipment is not used.
  c. Lower of cost or market impairments, including an allowance for obsolescence.
  d. Estimates and assumptions made in preparation of the estimate of income tax expense for the year.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

66. Almost every asset and liability account requires significant judgments. Which of the following judgments is subject to allowance for noncollectibility?

  a. Inventories.
  b. Marketable securities.
  c. Other receivables.
  d. Deferred revenue.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-01 – LO: 16-01
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Complex Audit Judgments

 

67. In which of the following cases is it not necessary for an auditor to revise the original materiality level and document the new materiality amount, as well as the rationale for changing the amount?

  a. If there is a change in circumstances that involve laws, regulations, or the accounting framework.
  b. If there is new information resulting from the risk assessment of the client.
  c. If there are changes in the understanding of the client about a new contractual agreement.
  d. If the client plans to change depreciation methods for new plant assets procured in the future.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

68. What document is prepared so that auditors can aggregate potential misstatements in order to assess the materiality of misstatements?

  a. The audit opinion.
  b. The summary of unadjusted audit differences.
  c. The summary of earnings trends.
  d. The post-closing trial balance.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

69. Which of the following statements is not true regarding the use of a judgmental approach by auditors in determining whether a misstatement is clearly trivial?

  a. The determination is based on past auditor experience.
  b. The determination is usually not very defensible to third-party users.
  c. The determination is usually not very defensible to regulators.
  d. The determination uses percentages for the likelihood of misstatement.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

70. Which of the following will the auditor will not consider when making a materiality determination?

  a. Potential default on loan covenants.
  b. Changes in segment earnings or trends in earnings.
  c. Factors that would affect the market’s perception of future growth and cash flow for the company.
  d. All of these insights would be considered.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

71. Which of the following would not be a reason to lower the threshold for materiality?

  a. The auditor is concerned with potential violations of debt covenants.
  b. There were proposed adjusting entries to a particular account in prior years.
  c. The consequences of a potential misstatement in an account balance are very high.
  d. The audit team wants to limit the amount of time spent at the client’s facilities.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

72. Performance materiality helps the auditor to determine which of the following?

  a. Extent of audit evidence needed.
  b. The specific analytical procedures to perform.
  c. The specific substantive procedures to perform.
  d. Control risk assessment.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

73. Although different audit firms take different approaches, performance materiality could be the same as overall materiality, or could be a percentage of overall materiality. Generally this range is which of the following?

  a. 25% to 75% of overall materiality.
  b. 50% to 75% of overall materiality.
  c. 25% to 50% of overall materiality.
  d. 40% to 75% of overall materiality.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

74. When a client has significant and nonrecurring charges to nonoperating expenses, which of the following would be the most appropriate materiality benchmark?

  a. Net profit.
  b. Income from continuing operations.
  c. Cash inflows.
  d. Cash outflows.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

75. For nonprofit entities, appropriate benchmarks for materiality judgments would include which of the following?

  a. Total assets and total liabilities.
  b. Total revenues and total assets.
  c. Total liabilities, total income, or total assets.
  d. Total expenses, total revenues, or total assets.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

76. Which of the following statements is not true about materiality judgments?

  a. The auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of users of financial statements.
  b. The auditor considers materiality only in relation to classes of transactions, account balances, and disclosures.
  c. Materiality judgments are used to help the auditor gather sufficient appropriate evidence about whether the financial statements are free of material misstatement.
  d. Materiality decisions differ from one audit client to another.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

77. Which of the following statements is false regarding materiality judgments?

  a. Materiality judgments are a matter of professional judgment.
  b. Materiality judgments depend on the needs of a reasonable person (an investor, potential investor, or other stakeholder) relying on the information.
  c. Materiality judgments involve both quantitative and qualitative considerations.
  d. Materiality judgments are easy for auditors to make.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

78. Which of the following is not a factor adding to the complexity of materiality judgments made by auditors?

  a. Regulators pay particular attention to the judgmental aspects of auditor materiality decisions.
  b. SEC regulators do not believe it is appropriate to use percentage terms to substitute for a full analysis of all relevant considerations regarding the magnitude of misstatement.
  c. Regulators focus on how materiality decisions can affect client financial results.
  d. SEC regulators have few requirements for auditors to comply with since the AICPA fills that role.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality Judgments

 

79. Which of the following is an approach used to determine posting material?

  a. Dual approach.
  b. Percentage approach.
  c. Qualitative approach.
  d. Planning approach.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

80. According to SAB 108, what approach is used when assessing uncorrected misstatements?

  a. Matrix approach.
  b. Dual approach.
  c. Percentage approach.
  d. Judgmental approach.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

81. Misstatements detected during the audit that were initially deemed to be immaterial must be summarized to determine which of the following?

  a. Materiality.
  b. Quantitative effect.
  c. Aggregate effects.
  d. Nature of misstatement.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

82. The adjustments arising from the audit that were considered to be material should be communicated by the auditor to which of the following?

  a. Audit staff.
  b. Management.
  c. Audit committee.
  d. Internal auditors.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

83. The auditor should have a sound basis, supported by objective evidence, regarding accounting estimates and should not fall victim to an “all estimates are subjective” argument in order to waive which of the following?

  a. Contingent liability.
  b. Material misstatements.
  c. Unrecorded liability.
  d. Material adjustments.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

84. Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement?

  a. Rollover method.
  b. Iron curtain method.
  c. Percentage approach.
  d. Judgmental method.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

85. Which method focuses on assuring that the year-end balance sheet is correct and does not consider the impact of prior-year uncorrected misstatements reversing in later years?

  a. Rollover.
  b. Iron curtain.
  c. Dual.
  d. Percentage.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

86. The discovery of an intentional misstatement, even if immaterial, could impact the auditor’s opinion on the effectiveness of which of the following?

  a. The client’s external controls.
  b. The client’s interim financial statements.
  c. The client’s internal controls over financial reporting.
  d. The client’s segment reports.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

87. Which of the following is required by the dual approach for assessing uncorrected misstatements?

  a. The application of the rollover method.
  b. The application of the iron curtain method.
  c. Simultaneous application of both the rollover and iron curtain methods.
  d. Sequential application of both the rollover and iron curtain methods.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

88. Which of the following is not a long-term liability account with a high risk of material misstatement?

  a. Warranty reserves.
  b. Pension obligations.
  c. Other postemployment benefits.
  d. Marketable securities.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

89. Which of the following is not a key type of evidence that the auditor needs to examine with respect to pensions and postemployment benefits?

  a. Whether the actuarial firm hired by management is independent, capable, and objective.
  b. The appropriateness of the actuarial firm’s work.
  c. The reasonableness of significant interest rate assumptions.
  d. The length of illnesses that pension recipients contract.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

90. Which of the following is not an element of pensions and other postemployment benefits that is difficult to estimate?

  a. Projected lifetime of former employees that will receive a pension.
  b. The future earnings of employees prior to retiring for defined benefit plans.
  c. Long-term interest rates to discount future costs back to present value.
  d. Current amounts earned on pension plan assets.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

91. Which of the following factors would be least likely to affect the estimate of the warranty liability?

  a. Changes in the product.
  b. Changes in the nature of the warranty.
  c. Changes in the sales staff.
  d. Changes in sales volume.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

92. An audit of the other postemployment benefits does not require estimates with respect to which of the following?

  a. Changes in medical expenses.
  b. Changes in coverage.
  c. Changes in average life expectancies.
  d. Changes in Human Resource personnel in charge of postemployment benefits.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-04 – LO: 16-04
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Long-Term Liabilities

 

93. If an acquired company remains intact after it has been acquired, it is defined as which of the following types of segments?

  a. Financing segment.
  b. Investing segment.
  c. Operating segment.
  d. Non-operating segment.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

94. Which of the following is not a significant challenge related to valuation issues for audits of merger and acquisition transactions?

  a. Valuing the assets upon acquisition.
  b. Valuing the liabilities upon acquisition.
  c. Measuring restructuring charges.
  d. Measuring the qualifications of personnel from the acquired company.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

95. Which one of the following is not an audit procedure used when testing restructuring charges?

  a. Review current and proposed financial accounting standards to determine if changes have occurred in accounting for restructuring.
  b. Evaluate the qualifications of management.
  c. Mathematically test the estimates.
  d. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or estimates from investment bankers, and (c) severance contracts.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

96. Which of the following is false regarding the valuation of goodwill?

  a. U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit.
  b. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit.
  c. Goodwill is tested for impairment quarterly.
  d. Goodwill is the excess of the purchase price over the fair market value of the acquired company’s tangible assets, identifiable intangible assets, and liabilities.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

97. Which of the following approaches for determining fair value of Level 3 assets is used by the auditor?

  a. Determining appropriate model and sensitivity of model.
  b. Reviewing contracts to determine if loss is other than temporary.
  c. Performing an analysis of volume of trading activity.
  d. Performing an analysis of trades on similar assets.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

98. Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets?

  a. Determining identical assets and active markets.
  b. Assessing client methodology and cash flows to originally estimate value.
  c. Determining appropriate model and inputs expected cash flows.
  d. Determining similar assets and relevant markets.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

99. Which of the following should the client have as part of its process for estimating fair value?

  a. A systematic process to identify each asset that is subject to realizable value estimation.
  b. A process to identify relevant historical values.
  c. An analysis of transactions that have taken place within the client’s organization.
  d. A realistic process to estimate future cash flows to discount back to a present value.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

100. In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1?

  a. Observable information on similar items.
  b. Nonexistence of active markets.
  c. Quoted prices on identical items.
  d. Relevant economic and industry factors.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

101. In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets?

  a. The correspondence of the client’s assets to similar assets in an active market.
  b. Contingent liabilities.
  c. Sensitivity of model used for marking to model.
  d. The performance of tests of controls.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

102. Which one of the following statements is not accurate about goodwill impairment valuations?

  a. Goodwill arising from acquisitions can be netted into one test at the operating segment level, but not netted at the company level.
  b. Market valuation may be volatile. A temporary decline in market value may not be a good indicator of FMV.
  c. FMV might not exist, might require independent appraisals by investment bankers or estimates using cash flow and discounted present value factors.
  d. No assumptions are required about competition, economic development, product placement, and so forth.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

103. Impairment is measured by the difference between market value of the operating segment and which of the following?

  a. Carrying value of net assets.
  b. Fair market value of net assets.
  c. Book value of total assets.
  d. Book value of current assets.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

104. In a standard audit program for goodwill impairment testing, if the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company, which approach should the auditor take?

  a. Compare market value with carrying value. A market value less than carrying value is presumptive evidence that goodwill has been impaired.
  b. Compare fair value with realizable value. A fair value less than realizable value is presumptive evidence that goodwill has been impaired.
  c. Compare book value with realizable value. A book value less than realizable value is presumptive evidence that goodwill has been impaired.
  d. Compare book value with market value. A market value less than book value is presumptive evidence that goodwill has been impaired.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

105. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 3?

  a. Quoted prices for identical items in active, liquid, and visible markets.
  b. Unobservable inputs to be used in illiquid situations.
  c. Observable information for similar items in active or inactive markets.
  d. Unobservable inputs to be used in situations where markets do not exist.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

106. The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective?

  a. Level 0.
  b. Level 1.
  c. Level 2.
  d. Level 3.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

107. The FASB has set a hierarchy of inputs to consider in assessing fair value.  Price taken from a recent trade on the NIKKEI of an index stock would fall under which level?

  a. Level 0.
  b. Level 1.
  c. Level 2.
  d. Level 3.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

108. Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value?

  a. Mark to market model.
  b. Replacement model.
  c. Mark to model.
  d. Historical cost model.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

109. Under which of the following approaches is the client expected to estimate fair value based on a model of the future cash flows associated with the instrument or the asset?

  a. Mark to market model.
  b. Replacement model.
  c. Mark to model.
  d. Historical cost model.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

110. Which one of the following general factors would not be considered when assessing identified internal control deficiencies?

  a. Control environment.
  b. Audit evidence from a poorly controlled system.
  c. Repeatability of a process.
  d. Complexity and subjectivity of the account balance affected by the deficiency.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

111. Material misstatements in the financial statements, including those requiring restatements strongly imply a material weakness in which of the following?

  a. Income statement.
  b. Balance sheet.
  c. Internal control over financial reporting.
  d. Cash flow statements.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

112. Which of the following factors can mitigate concerns that the auditor might otherwise have about a material weakness that was identified at an interim date?

  a. Remediation of the control deficiency after the interim date.
  b. Existence of a compensating control at the year-end date that was also present at the interim date.
  c. Weaknesses in the control environment.
  d. Ineffectiveness of oversight and governance.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

113. Which of the following factors is not relevant when assessing identified internal control deficiencies?

  a. Weaknesses in the control environment.
  b. The absence of a material misstatement in the financial statements.
  c. Volume of transactions affected by the deficiency.
  d. Effectiveness of oversight/governance.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

114. Which of the following reflects the scope of services performed in external auditing by a CPA?

  a. Risk analysis.
  b. Control analysis.
  c. Operations analysis.
  d. Audits of financial statements.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

115. Which of the following is not included in the scope of services performed in internal auditing by a CIA?

  a. Assurance and consulting.
  b. Operations analysis.
  c. Operational efficiency reviews.
  d. Internal control analysis.
  e. They are all included in the scope of services.

 

ANSWER:   e
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

116. Which of the following statements is true of external auditing?

  a. Major focus areas are processes, including risks, controls, and effectiveness and efficiency of processes.
  b. External auditors perform both assurance and consulting services for public companies.
  c. Primary scope of services performed includes audits of financial statements.
  d. The primary client for a public company is upper management.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

117. Which of the following statements is true of internal auditing?

  a. The primary client is the investor in the company.
  b. The primary nature of services include assurance and consulting.
  c. The parties receiving assurance are regulatory agencies and stockholders.
  d. Internal auditing must be responsible for gathering evidence in all audits, including external audits.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

118. Which of the following is the IIA’s stated position regarding the internal auditing activity?

  a. All responsibilities for internal auditing activity can be outsourced.
  b. An in-house liaison, such as an executive or senior management member, should be assigned the responsibility for internally managing the internal auditing activity.
  c. All internal auditors involved in the internal auditing activity must be CIAs.
  d. Internal auditors for the internal auditing activity should be supervised by CPAs.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

119. Which of the following factors is not considered in assessing the quality of the internal audit?

  a. Quality of working-paper documentation, reports, and recommendations.
  b. Review of quality of audit policies, programs, and procedures.
  c. Attestation services as demanded by market place.
  d. Educational level and professional experience.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

120. The partial or complete outsourcing of internal audit activities is most likely made to public accounting firms or to other specialized firms who perform which of the following?

  a. Primarily risk, control, and audit activities.
  b. Attestation services as demanded by market place.
  c. Operations analysis and risk analysis.
  d. Analytical and substantial procedures.

 

ANSWER:   a
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

121. A best practice is to have an oversight of the internal audit function as a responsibility of which of the following?

  a. Management.
  b. Internal auditors.
  c. Audit committee.
  d. External auditors.

 

ANSWER:   c
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

122. Which of the following is the international body that sets standards for the practice of internal auditing across the world?

  a. The Internal Audit Reporting Standards Board.
  b. The Institute of Internal Auditors.
  c. The International Accounting Standards Board.
  d. The Charter of Certified Internal Auditors.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

123. Assume that the external auditor decides that because of work performed by internal auditors, the audit risk has been reduced to an acceptable level. As a result of this assessment, the auditor can do which of the following?

  a. The auditor must test the assertions directly and document a separate conclusion.
  b. The auditor can decide that direct testing is not necessary.
  c. The auditor must delegate the responsibility of expressing an opinion to the internal auditors.
  d. The auditor can assume that inherent risk is zero.

 

ANSWER:   b
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

124. In making judgments about the effect of the internal auditors’ work on the external auditor’s procedures in specific audit areas, which of the following is not one of the issues related to the specific audit areas that is considered by the external auditor?

  a. Materiality of the financial statement amounts.
  b. Risk of material misstatement of the assertions related to these financial statement amounts.
  c. Degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions.
  d. All of the above are considered by the auditor.

 

ANSWER:   d
POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

125. Purpose of Materiality Judgments and Common Benchmarks

What are the key perspectives and concerns that auditors should be aware of when making materiality judgments? Explain the purpose of materiality judgments and common benchmarks.

ANSWER:   The key perspectives and concerns in materiality judgments are:

Auditors should pay attention to investor comment letters sent to the FASB, SEC, PCAOB, or other regulators to better understand materiality issues from an investor viewpoint. Investors are interested in long-term developing issues, not just short-term trends.

Audit firms realize that materiality judgments are difficult to make. As such, they spend a great deal of time training staff on how to make these judgments appropriately. Further, they have policies and computer decision aids that assist auditors in making the judgments correctly.

Auditors may overrely on quantitative measures of materiality because such measures do not require much thinking. The SEC has been very critical of auditors’ exclusive use of quantitative measures and encourages auditors to document their thought process regarding materiality choices.

The purpose of materiality judgments and common benchmarks:

Purposes

Posting materiality is a data accumulation and judgment aid that assists the auditor in aggregating information about the potential materiality of misstatements.

Materiality is used to help the auditor plan the audit. If planning materiality is set too high, the auditor may not perform sufficient procedures to detect material misstatements in the financial statements. If planning materiality is set too low, more substantive procedures may be performed than necessary.

Benchmarks

If a client has significant and nonrecurring charges to nonoperating expenses, then income from continuing operations may be a more appropriate materiality benchmark than net income.

For companies with a net loss, auditors sometimes use net loss as the benchmark. If a company’s net income varies significantly from year to year, the auditor might consider using an average of net income from the prior three to five years as the materiality benchmark.

For nonprofit entities, appropriate benchmarks would include total expenses, total revenues, or total assets.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

126. Considering Qualitative Factors

What are the considerations that may cause a quantitatively small misstatement to be considered material?

ANSWER:   Some of the considerations that may cause a quantitatively small misstatement to be considered material include whether the potential misstatement:

1. Arises from an item capable of precise measurement or whether it arises from an estimate and if so, the degree of imprecision inherent in the estimate.

2. Masks a change in earnings or other trends.

3. Hides a failure to meet analysts’ consensus expectations for the enterprise.

4. Changes a loss into income or vice versa.

5. Is in a segment that has been identified as having a significant effect on the company’s stock valuation.

6. Affects compliance with regulatory requirements.

7. Affects loan covenants or other contractual requirements.

8. Has the effect of increasing management’s compensation—for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation.

9. Involves concealment of an unlawful transaction.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-02 – LO: 16-02
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Materiality judgments

 

127. Assessing Whether Misstatements Are Material

What additional information might the auditor choose to analyze to determine whether or not the financial statements are misstated by a material amount?

ANSWER:   During the course of the audit, most of the time there will be multiple misstatements detected. Once misstatements are detected, the auditor should evaluate each misstatement individually, and the auditor should consider the aggregate effect of all misstatements.

Further, if an individual misstatement causes the financial statement as a whole to be materially misstated, that effect cannot be eliminated by other misstatements that have a different directional effect on the financial statements.

For example, if a company’s revenues are materially overstated, the auditor is not allowed to conclude that the effect is immaterial, even if there is an equal and off setting overstatement of expenses. Rather, the auditor would conclude in this case that the financial statements taken as a whole are materially misstated. The rationale is that the trend in revenue growth may be just as important to a user as the effect on net income.

The auditor should inform the audit committee about adjustments arising from the audit that were considered to be material. In addition, the auditor should also provide a list of uncorrected misstatements that were deemed not to be material.

Most auditors request the client to book all known misstatements (unless recording cost is very high) so there are not carryovers from year to year. If the client does not want to book the misstatement, the auditor should assume that the client considers the amount to be material.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-03 – LO: 16-03
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Misstatements

 

128. Auditing Merger and Acquisition Transactions

How does a company measure the cost of an acquisition of another company? What factors often complicate the determination of actual cost? Explain how each factor complicates the calculation of cost and the steps the auditor has to take to reach a conclusion about the cost of the acquisition.

ANSWER:   Costs associated with a merger and the valuation issues are as follows:

Assets – valued at current market value. This is usually determined by an appraisal for fixed assets. Current assets are usually determined through normal audit-type procedures, e.g. estimating current market value of inventory, collectability of receivables, etc.

Current liabilities – valued at market value. Typical audit procedures can be used to identify amounts eventually paid, or to discover unrecorded assets. The acquiring company can use these same procedures.

Long-term liabilities – should be adjusted for changes in interest rate and credit rating of the company. Usually a ready market value is available.

Other liabilities (subjective) – The auditor must be aware of significant changes that might be made to pension plans or other benefit plans. If there are changes, the auditor should engage an actuary to assist in making the judgment.

Restructuring reserves – this has been a difficult area and one that has been subject to a great deal of manipulation by CFO’s. Often, companies have overestimated the reserves for restructuring with intent to subsequently take the items into income. Newer accounting rules make it more difficult to manipulate these accounts.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-05 – LO: 16-05
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
TOPICS:   Audit Considerations for Merger and Acquisition Activities

 

129. Audit Program for Goodwill Impairment Testing

Outline the major elements of an audit program to determine whether there is a goodwill impairment, and if there is, the extent of the goodwill impairment.

ANSWER:   An overview of the audit program for goodwill impairment testing:

1. Review the methodology that the client initially used in determining the amount it used to purchase the reporting unit. Examine the initial client documents to determine:

a. Assumptions about economic growth and synergies expected with the acquisition.

b. Expected cash flow, discounted to present terms.

c. Cost savings expected from integrated operations.

d. Assumptions about the general economy, industry growth, and new-product innovation.

2. Compare actual results with those expected since the time of the acquisition.

a. Determine significant changes in assumptions and projected results.

b. Estimate the company’s acquisition model with new assumptions that reflect current market conditions, actual results, and current information about cost of capital to get an estimate of reporting unit fair value.

c. Compare fair value with carrying value and determine amount of goodwill impairment.

3. If the client does not have the original data, perform an independent analysis of the industry and develop:

a. A set of assumptions about future performance based on industry expectations and company products.

b. An estimated of future discounted cash flows.

c. A sensitivity analysis of changes in value based on industry and cash-flow assumptions.

d. A range of estimates and compare to carrying value of the reporting unit and goodwill carrying cost.

4. If the original reporting unit no longer exists because operations have been fully integrated into operations of the parent company:

a. Compare book value with market value. A market value less than book value is presumptive evidence that goodwill has been impaired.

b. Determine whether all other assets have been adjusted to fair value, where applicable.

c. Compute difference between market value and book value to determine the amount of goodwill impairment.

d. Review assumptions about future operations, industry position, expected future cash flows, and strategic plans for the business to determine if the write-off in part (c) is sufficient.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-06 – LO: 16-06
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Audit Considerations for Fair Value and Impairment

 

130. Critical Criteria in Assessing Identified Internal Control Deficiencies

What general factors should be considered by an auditor in evaluating whether or not a control deficiency is a material weakness, or a significant deficiency, or a control issue of lesser severity?

ANSWER:   The following general factors should be considered as the auditor evaluates whether or not a control deficiency is a material weakness, a significant deficiency, or simply a control issue of lesser severity:

Assessing Likelihood of Misstatement

When the auditor is evaluating a control deficiency, the auditor assesses both the likelihood (whether there is a reasonable possibility) of misstatement and the magnitude of potential misstatement.

AS 5 notes that various risk factors affect the likelihood that a deficiency, or a combination of deficiencies, will result in a misstatement.

These factors include:

•The nature of the financial statement accounts, disclosures, and assertions involved

•The susceptibility of the related asset or liability to loss or fraud

•The subjectivity, complexity, or extent of judgment required to determine the amount involved

•The interaction or relationship of the control with other controls, including whether they are interdependent or redundant

•The interaction of the deficiencies

•The possible future consequences of the deficiency

Assessing the Magnitude of a Misstatement

AS 5 also identifies factors affecting the magnitude of the misstatement that might result from a deficiency, including:

•The financial statement amounts or total of transactions exposed to the deficiency

•The volume of activity in the account balance or class of transactions exposed to the deficiency that has occurred in the current period or that is expected in future periods.

Other Factors

Other factors to consider when assessing a control deficiency include:

1. Control Environment. Weaknesses in specific components of the control environment have pervasive effects on the financial reporting process. More particularly, deficiencies in the competence of accounting personnel who deal with material account balances are normally considered a material weakness.

2. Repeatability of a Process. If a deficiency is repeatable, such as in a computerized process, the more likely it is to be material.

3. Volume of Transactions Affected. The auditor needs to assess the percentage of control failures multiplied by the average size of a transaction to determine if the amounts that could be misstated are material.

4. Complexity and Subjectivity of the Account Balance. The more complex and subjective a material account balance is, the more likely that a deficiency will be material.

5. Effectiveness of Oversight and Governance. One of the key elements of good internal control is that there should be strong oversight coming from the board of directors, and especially the audit committee. A lack of sufficient oversight would be considered a material weakness regardless of whether misstatements are actually detected in the financial statements.

6. Existence of Compensating Controls. Often there are other controls in place that might compensate for a deficiency in a particular control and that make the original weakness less likely to be judged material.

7. Remediation of a Control Deficiency. The auditor’s report addresses whether there are material weaknesses in the internal control as of the company’s year end. It is possible that a control deficiency may have been identified and remediated by the company prior to the company’s year end. Thus, a deficiency that may have been considered a material weakness at an interim date would no longer be considered a material weakness at year end.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-08 – LO: 16-08
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Assessing Deficiencies in Internal Control

 

131. Effect of Internal Audit’s Work on the External Audit

Provide examples of audit judgments made by the external auditor which would not typically be delegated to the internal auditor.

ANSWER:   Because the auditor has the ultimate responsibility to express an opinion on the financial statements, many of the audit judgments must be made by the external auditor and should not be delegated to the internal auditors.

Some of these judgments include assessments of:

• Inherent and control risks

• The materiality of misstatements

• The sufficiency of tests performed

• The evaluation of significant accounting estimates.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

132. Evaluating the Quality of Client’s Internal Audit Function

An external auditor assesses the quality of the internal audit function to determine whether the internal auditors’ work is relevant to the external audit and of sufficient quantity and quality. Describe the three factors of the internal audit function that would be considered by the external auditor in this quality assessment.

ANSWER:   The external auditor considers three primary characteristics in assessing the quality of the internal audit function:

1. Competence,

2. Objectivity, and

3. Quality of work performance.

Competence:

• Educational level and professional experience.

• Professional certification and continuing education.

• Review of quality of audit policies, programs, and procedures.

• Demonstrated supervision and review of internal auditors’ activities.

• Quality of working-paper documentation, reports, and recommendations.

• Periodic evaluation of internal auditors’ performance—both self-assessment and feedback from client management and audit committee.

• Periodic quality-control assessments performed in accordance with the International Standards for the Professional Practice of Internal Auditing.

Assessment of objectivity:

• An organizational reporting status is sufficient to assure audit coverage of major organizational risks as well as consideration of, and action on, the findings and recommendations of the internal auditors.

• Internal auditor has direct access and reports regularly to the board of directors, the audit committee, or the owner-manager.

• Board of directors, the audit committee, or the owner-manager oversees employment decisions related to the director of the internal audit function.

• Policies that prohibit internal auditors from auditing areas where relatives are employed in important or audit-sensitive positions.

• Policies that minimize other potential conflicts of interest, such as auditing an area where they were employed before entering internal audit, or where they will be placed after spending time in internal audit.

Assessing the quality of internal audit work:

• Scope of work is appropriate to meet the objectives.

• Audit programs are adequate.

• Working papers adequately document work performed, including evidence of supervision and review.

• Conclusions are appropriate in the circumstances.

• Reports are consistent with the results of the work performed.

POINTS:   1
LEARNING OBJECTIVES:   AUDT.JOHN.16.16-09 – LO: 16-09
NATIONAL STANDARDS:   United States – BUSPORG: Analytic
United States – BUSPROG: Communication
STATE STANDARDS:   United States – AK – AICPA BB-Critical thinking
TOPICS:   Internal Audit Function

 

 

 

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