To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com Auditing and Assurance Services, 14e (Arens) Chapter The Demand for Audit and Other Assurance Services Learning Objective 1-1 1) The Sarbanes-Oxley Act applies to which of the following companies? A) All companies B) Privately held companies C) Public companies D) All public companies and privately held companies with assets greater than $500 million Answer: C Terms: Sarbanes-Oxley Act Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills Topic: SOX 2) Which of the following is considered audit evidence? A) Oral statements Written Auditor made by management Communications Observation Y N N B) Oral statements made by management N Written Communications Y Auditor Observation Y Written Communications Y Auditor Observation Y Written Communications N Auditor Observation Y C) Oral statements made by management Y D) Oral statements made by management N Answer: C Terms: Audit evidence Diff: Moderate Objective: LO 1-1 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 3) Evidence is paramount to audit and attestation engagements List the four basic types of audit evidence Answer: The four types of audit and attestation evidence include: Electronic and documentary data about economic transactions Written and electronic communications with outsiders Observations by the auditor Oral testimony of the auditee (client) Terms: Basic types if audit evidence Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills 4) The criteria by which an auditor evaluates the information under audit may vary with the information being audited A) True B) False Answer: A Terms: Criteria which an auditor evaluates information Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills 5) The criteria used by an external auditor to evaluate published financial statements are known as generally accepted auditing standards A) True B) False Answer: B Terms: Criteria used by external auditor to evaluate published financial statements Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills 6) The Sarbanes-Oxley Act establishes standards related to the audits of privately held companies A) True B) False Answer: B Terms: Sarbanes-Oxley Act Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills Topic: SOX Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 7) The Sarbanes-Oxley Act is widely viewed as having ushered in sweeping changes to auditing and financial reporting A) True B) False Answer: A Terms: Sarbanes-Oxley Act Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills Topic: SOX 8) Only companies that file annual statements with the Securities and Exchange Commission are required to have an annual external audit A) True B) False Answer: B Terms: Required to have an annual external audit Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills Learning Objective 1-2 1) Recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making is commonly called: A) finance B) auditing C) accounting D) economics Answer: C Terms: Recording, classifying, and summarizing economic events Diff: Easy Objective: LO 1-2 AACSB: Reflective thinking skills 2) Which department provides quantitative information in order for management and others to make decisions? A) management information systems B) auditing C) finance D) accounting Answer: D Terms: Department that provides quantitative information for management Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 3) In "auditing" financial accounting data, the primary concern is with: A) determining whether recorded information properly reflects the economic events that occurred during the accounting period B) determining if fraud has occurred C) determining if taxable income has been calculated correctly D) analyzing the financial information to be sure that it complies with government requirements Answer: A Terms: Auditing financial accounting data primary concern Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking skills 4) The trait that distinguishes auditors from accountants is the: A) auditor's ability to interpret accounting principles generally accepted in the United States B) auditor's education beyond the Bachelor's degree C) auditor's ability to interpret FASB Statements D) auditor's accumulation and interpretation of evidence related to a company's financial statements Answer: D Terms: Distinguishes auditors from accountants Diff: Challenging Objective: LO 1-2 AACSB: Reflective thinking skills 5) Discuss the differences and similarities between the roles of accountants and auditors What additional expertise must an auditor possess beyond that of an accountant? Answer: The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making To provide relevant information, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information In addition, accountants must develop a system to ensure that the entity's economic events are properly recorded on a timely basis and at a reasonable cost The role of auditors is to determine whether the recorded information prepared by accountants properly reflects the economic events that occurred during the accounting period Because U.S or international standards provide the criteria for evaluating whether financial information is properly recorded, auditors must thoroughly understand those accounting standards In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence It is this expertise that distinguishes auditors from accountants Determining the proper audit procedures, deciding the number and types of items to test, and evaluating the results are unique to the auditor Terms: Roles of accountants and auditors Diff: Moderate Objective: LO 1-2 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com Learning Objective 1-3 1) risk reflects the possibility that the information upon which the business decision was made was inaccurate A) Client acceptance B) Information C) Business D) Control Answer: B Terms: Risk that reflects the possibility that information upon which business risk decision was made Diff: Moderate Objective: LO 1-3 AACSB: Reflective thinking skills 2) The use of the Certified Public Accountant title is regulated by: A) the federal government B) state law through a licensing department or agency of each state C) the American Institute of Certified Public Accountants through the licensing departments of the tax and auditing committees D) the Securities and Exchange Commission Answer: B Terms: Certified Public Accountant title Diff: Moderate Objective: LO 1-3 AACSB: Reflective thinking skills 3) Financial statement users often receive unreliable financial information from companies Which of the following is not a common reason for this? A) Complex exchange transactions B) Voluminous data C) Remoteness of information D) Each of these choices is a common reason for unreliable financial information Answer: D Terms: Common reason for financial statements users receiving unreliable financial information Diff: Moderate Objective: LO 1-3 AACSB: Reflective thinking skills 4) Explain what is meant by information risk, and list the four causes of this risk Answer: Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate Four causes of information risk are: • remoteness of information, • biases and motives of the provider, • voluminous data, and • complex exchange transactions Terms: Information risk definition and causes Diff: Easy Objective: LO 1-3 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com Learning Objective 1-4 1) An audit of historical financial statements is most often performed to determine whether the: A) organization is operating efficiently and effectively B) entity is following specific procedures or rules set down by some higher authority C) management team is fulfilling its fiduciary responsibilities to shareholders D) none of these choices Answer: D Terms: Audit of historical financial statements Diff: Moderate Objective: LO 1-4 AACSB: Reflective thinking skills Learning Objective 1-5 1) In the audit of historical financial statements, what accounting criteria is most common? A) Regulatory accounting principles B) International financial reporting standards C) Generally accepted accounting principles D) B and C E) All of the above Answer: C Terms: Most common accounting criteria Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking skills 2) Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made by another party is a(n): A) accounting and bookkeeping service B) attestation service C) assurance service D) tax service Answer: B Terms: Strengthen internal controls over accounting for materials used in production Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking skills 3) Three common types of attestation services are: A) audits, reviews, and attestations regarding internal controls B) audits, verifications, and attestations regarding internal controls C) reviews, verifications, and attestations regarding internal controls D) audits, reviews, and verifications Answer: A Terms: Types of attestation services Diff: Easy Objective: LO 1-5 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 4) Which of the following services provides the lowest level of assurance on a financial statement? A) A review B) An audit C) Neither service provides assurance on financial statements D) Each service provides the same level of assurance on financial statements Answer: A Terms: Service provides lowest level of assurance on a financial statement Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills 5) Which of the following is not a SysTrust Services principle as defined by the AICPA? A) Online privacy B) Availability C) Processing integrity D) Operational integrity Answer: D Terms: SysTrust Services principles defined by AICPA Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills 6) The Sarbanes-Oxley Act prohibits a CPA firm that audits a public company from providing which of the following types of services to that company? A) Reviews of quarterly financial statements B) Preparation of corporate tax returns C) Most consulting services D) Tax services Answer: C Terms: Sarbanes-Oxley Act Diff: Challenging Objective: LO 1-5 AACSB: Reflective thinking skills Topic: SOX Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 7) Which of the following are required to have a written report regarding the assertion of another party? A) Financial Statement Operational Compliance Attestation Assurance Audit Audit Audit Engagement Engagement Y Y Y Y Y B) Financial Statement Audit Y Operational Audit Y Compliance Audit Y Attestation Engagement Y Assurance Engagement N Financial Statement Audit Y Operational Audit Y Compliance Audit Y Attestation Engagement N Assurance Engagement N Financial Statement Audit N Operational Audit N Compliance Audit N Attestation Engagement Y Assurance Engagement Y C) D) Answer: B Terms: Required to have a written report Diff: Challenging Objective: LO 1-5 AACSB: Reflective thinking skills 8) Attestation services on information technology include WebTrust services and SysTrust services Which of the following statements most accurately describes SysTrust services? A) SysTrust services provide assurance on business processes, transaction integrity and information processes B) SysTrust services provide assurance on system reliability in critical areas such as security and data integrity C) SysTrust services provide assurance on internal control over financial reporting D) SysTrust services provide assurance as to whether accounting personnel are following procedures prescribed by the company controller Answer: B Terms: Attestation services on information technology; WebTrust and Systrust services Diff: Challenging Objective: LO 1-5 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 9) Two types of attestation services provided by CPA firms are audits and reviews Discuss the similarities and differences between these two types of attestation services Which type provides the least assurance? Answer: In both the review and audit of the historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards The CPA provides a lower level of assurance for reviews of financial statements compared to the high level for audits, therefore less evidence is needed A review is often adequate to meet financial statement users' needs It can be provided by a CPA firm at a much lower fee than an audit because less evidence is needed Terms: Attestation services; Audits and reviews of historical financial statements Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills 10) What is an engagement to attest on internal control over financial reporting? Answer: For an audit of internal control over financial reporting, management asserts that internal controls have been developed and implemented following well established criteria Section 404 of the Sarbanes-Oxley Act requires public companies to report management's assessment of the effectiveness of internal control over financial reporting The Act also requires auditors to attest to the effectiveness of internal control over financial reporting This evaluation, which is integrated with the audit of financial statements, increases user confidence about future financial reporting, because effective internal controls reduce the likelihood of future misstatements in the financial statements Terms: Engagement to attest on internal control over financial reporting Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills Topic: SOX 11) What are the five categories of attestation services? Answer: The five categories of attestation services include: • audit of historical financial statements, • attestation on internal control over financial reporting, • review of historical financial statements, • attestation services on information technology, and • other attestation services that may be applied to a broad range of subject matter Terms: Categories of attestation services Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 12) What is a WebTrust engagement? What is a SysTrust engagement? How they differ? Answer: WebTrust is a service provided by a CPA where the CPA provides assurance that the Web Site owner has met established criteria related to business practices, transaction integrity, and information processes SysTrust is a service provided by a CPA to evaluate and test a system reliability in areas such as security and data integrity There are five principles that must be addressed on a SysTrust engagement: security, availability, processing integrity, online privacy, and confidentiality WebTrust is primarily designed to provide assurance to third party users of a Web site SysTrust provides assurance to management, the board of directors or third parties about the reliability of information systems used to generate real-time information Terms: WebTrust and SysTrust engagements Diff: Challenging Objective: LO 1-5 AACSB: Reflective thinking skills 13) CPA firms are never allowed to provide bookkeeping services for clients A) True B) False Answer: B Terms: CPA services provided to clients Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills 14) Section 404 of the Sarbanes-Oxley Act requires public companies to have an external auditor attest to their internal control over financial reporting A) True B) False Answer: A Terms: Section 404 of the Sarbanes-Oxley Act Diff: Moderate Objective: LO 1-5 AACSB: Reflective thinking skills Topic: SOX 15) Most public companies' audited financial statements are available on the SEC's EDGAR database A) True B) False Answer: A Terms: Public companies' audited financial statements: SEC's EDGAR database Diff: Challenging Objective: LO 1-5 AACSB: Reflective thinking skills 10 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 9) The reliance the auditor places on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily: A) parallel B) inverse C) direct D) equal Answer: B Terms: Reliance auditor places on substantive tests and internal controls Diff: Moderate Objective: LO 13-2 AACSB: Reflective thinking skills 10) A deficiency uncovered in the audit of internal control is explained by which of the following in relation to a financial statement misstatement? A) the amount of the misstatement B) the likelihood of the misstatement C) the amount, likelihood, and classification of the misstatement D) the amount and the classification of the misstatement Answer: B Terms: Deficiency uncovered in audit of internal control Diff: Challenging Objective: LO 13-2 AACSB: Reflective thinking skills 11) Which of the following is not a valid basis for omitting an audit test in forming an opinion on the clients financial statements? A) the difficulty and expense involved in testing a particular item B) the relative risk involved C) the degree of reliance on the relevant internal controls D) the relationship between the cost of obtaining evidence and its usefulness Answer: A Terms: Not a valid basis for omitting an audit test in forming an opinion Diff: Challenging Objective: LO 13-2 AACSB: Reflective thinking skills 12) Three factors the auditor considers when assessing control risk are: the auditor's belief concerning the effectiveness of internal controls, the results of tests of controls, and the cost-effectiveness of a reduced assessed control risk Identify the combination of conditions for these three factors that is required before a reduction in substantive testing is permitted Answer: A reduction in substantive testing is permitted when (1) the auditor identifies specific controls he or she believes have been operating effectively during the period under audit, (2) the auditor believes it will be cost-effective to test those controls, and (3) the results of tests of controls indicate that the controls have indeed been operating effectively Terms: Three factors auditor considers when assessing control risk and conditions before reduction in substantive testing Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 12 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 13) Tests of controls are generally more costly to perform than analytical procedures A) True B) False Answer: A Terms: Cost of tests of controls vs analytical procedures Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 14) Substantive tests of details of balances are the most costly type of audit test to perform A) True B) False Answer: B Terms: Substantive tests of details of balances cost Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 15) Analytical procedures are the least costly type of audit test A) True B) False Answer: A Terms: Analytical procedures cost Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 16) If inherent risk is increased to medium from low, tests of details of balances can be reduced A) True B) False Answer: B Terms: Inherent risk; Details of balances Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 17) The extent of tests of details of balances cannot be reduced when transaction-related audit objectives have been satisfied by tests of controls or substantive tests of transactions A) True B) False Answer: B Terms: Extent of details of balances; Transaction-related audit objectives; Tests of controls and substantive tests of transactions Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 13 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 18) Tests of controls and substantive tests of transactions are normally conducted simultaneously on the same transactions A) True B) False Answer: A Terms: Not considered a further audit procedure Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 19) Under normal circumstances, there should be no variation in the audit evidence mix from cycle to cycle for a given audit engagement A) True B) False Answer: B Terms: Variation in audit evidence in cycles Diff: Easy Objective: LO 13-2 AACSB: Reflective thinking skills 20) Analytical procedures are the most expensive type of audit test to perform because of the expertise and training required to properly use them A) True B) False Answer: B Terms: Analytical procedures cost Diff: Moderate Objective: LO 13-2 AACSB: Reflective thinking skills 21) The results of tests of controls and substantive tests of transactions affect the design of tests of details of balances A) True B) False Answer: A Terms: Results of tests of controls affect design of tests of details of balances Diff: Moderate Objective: LO 13-2 AACSB: Reflective thinking skills 22) If the auditor's preliminary assessment of control risk is decreased from high to medium, tests of controls can be reduced A) True B) False Answer: B Terms: Auditor's preliminary assessment of control risk Diff: Moderate Objective: LO 13-2 AACSB: Reflective thinking skills 14 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com Learning Objective 13-3 1) The most important consideration in developing the audit plan and audit program is the: A) client's size B) client's industry C) audit firm's available personnel D) audit risk model used in its planning form Answer: D Terms: Most important consideration in developing the audit plan and audit program Diff: Moderate Objective: LO 13-3 AACSB: Reflective thinking skills 2) Auditors who test manual controls that rely on IT-generated reports must consider: A) the benefits of relying on IT-generated reports B) separation of duties related to the IT-generated reports C) the controls related to the accuracy of the information in the report D) whether the manual controls are approved by the audit committee Answer: C Terms: Test manual controls that rely on IT-generated reports Diff: Moderate Objective: LO 13-3 AACSB: Reflective thinking skills 3) Auditing standards recognize that in instances where a significant amount of audit evidence is in electronic form, it may not be possible to reduce detection risk to an acceptable level by performing only substantive tests A) True B) False Answer: A Terms: Auditing standards; Evidence in electronic form reduces detection risk Diff: Moderate Objective: LO 13-3 AACSB: Reflective thinking skills 4) In the audit of a public company, computer controls must be tested if they are considered to be key controls for reducing the likelihood of material misstatements in the financial statements A) True B) False Answer: A Terms: Audit of public company testing of computer controls Diff: Challenging Objective: LO 13-3 AACSB: Reflective thinking skills Topic: Public 15 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 5) Procedures to obtain an understanding of internal control may suffice for tests of controls when the auditor is assessing automated controls A) True B) False Answer: A Terms: Procedures to obtain understanding of internal control; Tests of controls; Automated controls Diff: Challenging Objective: LO 13-3 AACSB: Reflective thinking skills Learning Objective 13-4 1) The evidence mix includes risk assessment procedures A) True B) False Answer: B Terms: Evidence mix and risk assessment procedures Diff: Moderate Objective: LO 13-1 and LO 13-4 AACSB: Reflective thinking skills Learning Objective 13-5 1) A document that details what the auditor will to gather sufficient, appropriate evidence is the: A) audit strategy B) audit program C) audit procedure D) audit risk model Answer: B Terms: Document that details what the audit will to gather sufficient, appropriate evidence Diff: Easy Objective: LO 13-5 AACSB: Reflective thinking skills 2) Auditors follow a four step approach to reduce assessed control risk Which of the following is not one of the four? A) Apply transaction related audit objectives to a class of transactions B) Indentify accounts that have high inherent risk C) Identify key controls that reduce control risk D) For potential misstatements, design appropriate substantive tests of transactions Answer: B Terms: Approach to reduce assessed control risk Diff: Moderate Objective: LO 13-5 AACSB: Reflective thinking skills 16 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 3) When designing tests of controls and substantive tests an auditor is gathering evidence to satisfy the transaction related audit objectives What are the four steps the auditor would normally follow to reduce assessed control risk? Answer: Apply the transaction-related audit objectives to the class of transactions being tested Identify key controls that should reduce control risk for each transaction- related audit objective Develop appropriate tests of controls for all internal controls that are used to reduce the preliminary assessment of control risk below maximum For potential types of misstatements related to each transaction-related audit objective, design appropriate substantive tests of transactions, considering deficiencies in internal control and expected results of the tests of controls Terms: Four-step approach to reduce assessed control risk Diff: Easy Objective: LO 13-5 AACSB: Reflective thinking skills 4) What are the four steps auditors follow when they plan to reduce assessed control risk? Answer: The steps are as follows: Apply transaction-related audit objectives to the class of transaction being tested Identify key controls that should reduce control risk for each transaction-related audit objective Develop appropriate tests of controls for all internal controls used to reduce the preliminary assessment of control risk below maximum For potential types of misstatements related to each transaction-related audit objectives, design appropriate substantive tests of transactions, considering deficiencies in internal control and expected results of the tests of controls Terms: Steps auditors follow when they plan to reduce assessed control risk Diff: Challenging Objective: LO 13-5 AACSB: Reflective thinking skills 5) Discuss the relationship of each of the following to the extent of planned tests of details of balances: (1) tolerable misstatement, (2) inherent risk, (3) control risk, and (4) acceptable audit risk Answer: Inherent risk and control risk are directly related to the extent of planned tests of details of balances; that is, as inherent risk and/or control risk increase, the extent of planned tests of details of balances also increases Tolerable misstatement and acceptable audit risk are inversely related to the extent of planned tests of details of balances; that is, as tolerable misstatement and/or acceptable audit risk increase, the extent of planned tests of details of balances decreases Terms: Relationship of extent of planned tests of details of balances and tolerable misstatement, inherent risk, control risk, and acceptable audit risk Diff: Challenging Objective: LO 13-5 AACSB: Reflective thinking skills 17 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 6) Auditing standards require a written audit program A) True B) False Answer: A Terms: Auditing standards; Audit program Diff: Easy Objective: LO 13-5 AACSB: Reflective thinking skills 7) When designing an audit program for tests of details of balances, the auditor should make assumptions about inherent risk and control risk, and predictions concerning the outcome of tests of controls, substantive tests of transactions, and analytical procedures A) True B) False Answer: A Terms: Designing audit program; Inherent risk and control risk; Tests of controls, substantive tests of transactions, and analytical procedures Diff: Easy Objective: LO 13-5 AACSB: Reflective thinking skills 8) When testing details of balances, most audit procedures satisfy only one balance-related objective, but more than one audit procedure should be used to test each objective A) True B) False Answer: B Terms: Testing details of balances and audit procedures Diff: Moderate Objective: LO 13-5 AACSB: Reflective thinking skills 9) Substantive tests of transactions and control tests are often conducted simultaneously A) True B) False Answer: A Terms: Substantive tests of transactions and control tests Diff: Moderate Objective: LO 13-5 AACSB: Reflective thinking skills 10) Auditing standards require that tests of controls be performed on every audit engagement A) True B) False Answer: B Terms: Auditing standards require tests of controls Diff: Moderate Objective: LO 13-5 AACSB: Reflective thinking skills 18 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com Learning Objective 13-6 1) Which of the following types of procedures will be performed in an audit of internal control over financial reporting? A) Procedures to obtain an understanding of internal control Ratio analysis Yes Yes B) Procedures to obtain an understanding of internal control No Ratio analysis No Procedures to obtain an understanding of internal control Yes Ratio analysis No Procedures to obtain an understanding of internal control No Ratio analysis Yes C) D) Answer: C Terms: Types of procedures performed in an audit of internal control Diff: Moderate Objective: LO 13-6 AACSB: Reflective thinking skills Topic: Public 2) What type of test is used to obtain more types of evidence than any other? A) Substantive tests of transactions B) Tests of controls C) Analytical procedures D) Tests of details Answer: D Terms: Type of test used to obtain more types of evidence Diff: Challenging Objective: LO 13-6 AACSB: Reflective thinking skills 19 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 3) Which audit tests involve physical examination and confirmation? A) tests of controls B) tests of transactions C) tests of balances D) analytical procedures Answer: C Terms: Audit tests that involve physical examination and confirmation Diff: Challenging Objective: LO 13-6 AACSB: Reflective thinking skills 4) Which of the following is generally not included in the "evidence mix"? A) Tests of Controls B) Substantive Tests of Transactions C) Risk Assessment Procedures D) Tests of details of balances Answer: C Terms: Evidence mix Diff: Challenging Objective: LO 13-6 AACSB: Reflective thinking skills 5) Which of the following types of evidence is not available when using substantive tests of transactions? A) Documentation B) Confirmation C) Inquiries of the client D) Reperformance Answer: B Terms: Types of evidence not available when using substantive tests of transactions Diff: Challenging Objective: LO 13-6 AACSB: Reflective thinking skills 6) Analytical procedures provide fewer types of evidence than any other type of audit test A) True B) False Answer: A Terms: Analytical procedures and evidence Diff: Challenging Objective: LO 13-6 AACSB: Reflective thinking skills 20 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com Learning Objective 13-7 1) Presentation and disclosure related audit objectives would be performed in which phase of the audit process? A) plan and design audit approach B) perform audit tests for controls and transactions C) perform analytical procedures and tests of balances D) complete the audit and issue the audit report Answer: D Terms: Presentation and disclosure related audit objective performed in what phase of audit process Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 2) Transaction related audit objectives would most likely be performed in which phase of the audit process? A) plan and design audit approach B) perform audit tests for controls and transactions C) perform analytical procedures and tests of balances D) complete the audit and issue the audit report Answer: B Terms: Transaction related audit objectives performed in what phase of audit process Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 3) Analytical procedures must be performed in: A) the planning and test of control stages B) conjunction with tests of transactions and tests of details of balances C) the planning and completion stages D) the planning, test of control, and completion stages Answer: C Terms: Analytical procedures must be performed Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 4) Which of the following tests commonly occur together? A) substantive tests of transactions and tests of controls B) substantive tests of transactions and obtaining an understanding of internal controls C) analytical procedures and tests of controls D) tests of controls and tests of details of balances Answer: A Terms: Tests that occur together Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 21 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 5) Tests of controls and substantive tests of transactions are an important determinant of the extent of the auditor's use of tests of details of balances Which of the following is true? A) They are likely to be performed prior to the clients end of the fiscal year B) They are likely to eliminate the need for tests of details of balances C) They are likely to have no impact on the planned tests of details of balances D) They are likely to be used only in the audit of internal control Answer: A Terms: Tests of controls and substantive tests of transactions Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 6) When the auditor has completed the tests of details of balances and enters phase of the audit process, she must still perform audit procedures for which of the following? A) contingent liabilities and employee compensation B) contingent liabilities and subsequent events C) subsequent events and contractual commitments D) subsequent events and unrecorded liabilities Answer: B Terms: Audit procedures performed in phase of audit process Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 7) Which of the following audit tests would be regarded as a test of controls? A) Comparison of the inventory pricing to vendors' invoices B) Tests of the signatures on canceled checks to board of directors' authorizations C) Tests of the additions to property, plant, and equipment by physical inspections D) Review of the specific items making up the balance in a given general ledger account Answer: B Terms: Tests of controls audit tests Diff: Moderate Objective: LO 13-7 AACSB: Analytic skills 8) Which of the following audit tests form the basis for an auditor's report on internal control over financial reporting? A) Analytical procedures B) Tests of transactions C) Tests of controls D) Tests of details of balances Answer: C Terms: Audit tests that form basis for auditor's report on internal control Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills Topic: Public 22 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 9) After finishing the review phase of the study and evaluation of internal control in an audit, the auditor should perform tests of controls on: A) those controls that the auditor wants and plans to rely upon B) those controls in which material weaknesses were identified C) those controls that have a material effect upon the financial statement balances D) a random sample of the controls that were reviewed Answer: A Terms: After finishing the review phase of study and evaluation of internal control in an audit, auditor should perform Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 10) At what point in the audit process are tests of details most appropriately designed? A) plan and design audit approach B) perform audit tests for controls and transactions C) perform analytical procedures and tests of balances D) complete the audit and issue the audit report Answer: C Terms: Audit process and test of details Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 23 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 11) Which of the following is/are performed in an audit of internal control over financial reporting? A) Procedures to obtain an understanding of internal control Test of details of balances Analytical Procedures Yes Yes No B) Procedures to obtain an understanding of internal control Yes Test of details of balances No Analytical Procedures No Procedures to obtain an understanding of internal control No Test of details of balances Yes Analytical Procedures Yes Procedures to obtain an understanding of internal control No Test of details of balances No Analytical Procedures Yes C) D) Answer: B Terms: Audit of internal control over financial reporting Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills Topic: Public 12) Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? A) the audit program B) the auditor's judgment C) generally accepted auditing standards D) the auditor's working papers Answer: B Terms: Determines specific audit procedures Diff: Challenging Objective: LO 13-7 AACSB: Reflective thinking skills 24 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 13) In phase of the audit, complete the audit and issue an audit report, there are five activities required List below the activities Answer: Perform additional tests for presentation and disclosure Accumulate final evidence Evaluate results Issue audit report Communicate with audit committee and management Terms: Phase of audit Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 14) In accumulating final evidence upon which to base an audit opinion, the auditor should perform four activities List the activities below Answer: Perform final analytical procedures Evaluate the going concern assumption Obtain a client representation letter Read information in the annual report to ensure that it is consistent with the financial statements Terms: Accumulating final evidence and final activities Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 15) Discuss the major activities and procedures performed by the auditor in the plan and design of the audit approach Answer: The major activities performed in the planning and design phase (Phase I) are: • Accept client and perform initial planning • Understand the clients business and industry • Assess client business risk • Perform preliminary analytical procedures • Set materiality and assess acceptable audit risk and inherent risk • Understand internal control and assess control risk • Gather information to assess fraud risks • Develop overall audit plan and audit program Terms: Major activities and procedures performed by auditor in the plan and design of the audit approach Diff: Challenging Objective: LO 13-7 AACSB: Reflective thinking skills 25 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall To Todownload downloadmore moreebooks, ebooks,slides, slides,SM SMand andTB TBvisit: visit:http://downloadslide.blogspot.com http://downloadslide.blogspot.com 16) The auditor must communicate significant deficiencies in internal control only after the entire audit is complete to ensure the auditor has a sufficient understanding of the circumstances surrounding the deficiency A) True B) False Answer: B Terms: Auditor communicate significant deficiencies in internal control Diff: Moderate Objective: LO 13-7 AACSB: Reflective thinking skills 26 Copyright © 2012 Pearson Education, Inc publishing as Prentice Hall ... thinking skills 3) Three common types of attestation services are: A) audits, reviews, and attestations regarding internal controls B) audits, verifications, and attestations regarding internal controls... of attestation services include: • audit of historical financial statements, • attestation on internal control over financial reporting, • review of historical financial statements, • attestation... internal controls C) reviews, verifications, and attestations regarding internal controls D) audits, reviews, and verifications Answer: A Terms: Types of attestation services Diff: Easy Objective: LO