Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of the client?

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of the client?

a. all of the answers are correct
b. an internal control questionnaire
c. a flowchart of the documents and procedures used by the company
d. a narrative memorandum describing the control system


Answer: b. an internal control questionnaire

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to

a. provide the rational for the inherent risk assessment at the financial statement assertion level
b. provide information for a communication of internal control-related matters to management
c. provide a basis for making constructive suggestions in a management letter
d. determine the nature, timing and extent of tests to be performed in the audit



Answer: d. determine the nature, timing and extent of tests to be performed in the audit

The most important fundamental component of an entity's internal control is

a. reliability of financial reporting
b. people who operate the control system
c. compliance with laws and regulations
d. effectiveness and efficiency of operations


Answer: b. people who operate the control system

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except

a. confirmation of balances
b. inspection of documentation
c. inquiry of client personnel
d. observation of company operations


Answer: a. confirmation of balances

Effectiveness of audit procedures would be reduced by

a. performing procedures during the interim period as opposed to at the fiscal year-end date
b. performing audit procedures at the fiscal year-end date as opposed to the interim period
c. deciding to obtain external evidence instead of internal evidence
d. selecting larger sample sizes for audit


Answer: a. performing procedures during the interim period as opposed to at the fiscal year-end date

An audit committee is

a. a committee composed of persons not associating in any way with the client or the board of directors
b. composed of internal auditors
c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company
d. composed of members of the audit team


Answer: c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to

a. determine whether to contact law enforcement officials
b. recommend remedial actions to the audit committee
c. evaluate the effect of the noncompliance on the financial statements
d. determine whether other similar acts could have occurred


Answer: c. evaluate the effect of the noncompliance on the financial statements

Auditors perform analytical procedures in the planning stage of an audit for the purpose of

a. identifying unusual conditions that deserve more auditing effort
b. determining which of the financial statement assertions are the most important for the client's financial statements
c. determining the nature, timing, and extent of audit procedures for auditing the inventory
d. deciding that matters to cover in an engagement letter


Answer: a. identifying unusual conditions that deserve more auditing effort

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?

a. auditors must design tests to detect all noncompliance that directly affects the financial statements
b. auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected
c. the responsibility for detecting noncompliance exactly parallels the responsibilities for errors and fraud
d. auditors must design tests to detect all material noncompliance that indirectly affects the financial statements


Answer: b. auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected

It is acceptable under generally accepted auditing standards for an audit team to

It is acceptable under generally accepted auditing standards for an audit team to

a. assess inherent risk at zero and perform a minimum of detection work
b. assess control risk at zero and perform a minimum of detection work
c. decide that audit risk can be 40 percent
d. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work


Answer: d. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work

Auditors are not responsible for accounting estimates with respect to

a. determining the reasonableness of estimates
b. determining that estimates are adequately disclosed in the financial statements
c. determining that estimates are presented in conformity with GAAP
d. making the estimates


Answer: d. making the estimates

An audit strategy contains

a. documentation of the assertions under audit, the evidence obtained, and the conclusions reached
b. reconciliation of the account balances in the financial statements with the account balances in the client's general ledger
c. specifications of procedures the auditors believe appropriate for the financial statements under audit
d. specifications of auditing standards relevant to the financial statements being audited


Answer: c. specifications of procedures the auditors believe appropriate for the financial statements under audit

Under the Private Securities Litigation Reform Act, independent auditors are required to first

Under the Private Securities Litigation Reform Act, independent auditors are required to first

a. report clearly inconsequential noncompliance to the audit committee of the client's board of directors
b. resign from the audit engagement and report the instances of noncompliance to the SEC
c. report to the SEC all instances of noncompliance that believe have a material effect on financial statements if the board of directors does not first report to the SEC
d. report in writing all instances of noncompliance to the client's board of directors


Answer: c. report to the SEC all instances of noncompliance that believe have a material effect on financial statements if the board of directors does not first report to the SEC

Analytical procedures used when planning an audit should concentrate on

a. accounts and relationships that can represent specific potential problems and risks in the financial statements
b. management assertions in financial statements
c. weaknesses in the company's internal control activities
d. predictability of account balances on individual transactions


Answer: a. accounts and relationships that can represent specific potential problems and risks in the financial statements

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?

a. evidence of a conservative systematic bias
b. assumptions that are similar to industry guidelines
c. key factors that are consistent with prior periods
d. measurements that are objective and not susceptible to bias


Answer: a. evidence of a conservative systematic bias

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?

a. 0.10
b. 0.00
c. 0.20
d. 0.75


Answer: a. 0.10

When a company that sells its products for a (gross) profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods ratio will

a. decrease
b. increase
c. remain unchanged
d. not be able to be determined with the information provided


Answer: a. decrease

Analytical procedures can be used in which of the following ways?

a. as "attention-directing" methods when planning an audit at the beginning
b. as a means of overall review at the end of the audit
c. as substantive audit procedures to obtain evidence during an audit
d. all of the answers are correct


Answer: d. all of the answers are correct

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05)

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to

a. be unchanged
b. change from 0.1 to 0.04
c. change from 0.2 to 0.3
d. change from 0.25 to 0.1


Answer: d. change from 0.25 to 0.1

Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?

a. exercising more professional skepticism
b. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis
c. studying management's selection and application of accounting principles more carefully
d. carefully avoiding conducting interviews with people in the fraud-rich areas


Answer: b. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis

Analytical procedures are generally used to produce evidence from

a. detailed examination of external, external-internal, and internal documents
b. relationships among current financial balances and prior balances, forecasts and non-financial data
c. confirmations mailed directly to the auditors by client customers
d. physical observation of inventories


Answer: b. relationships among current financial balances and prior balances, forecasts and non-financial data