AUDITING THEORY

ARRIANE P. NISPEROS, CPA

NOTRE DAME OF DADIANGAS UNIVERSITY JULY 12, 2013

Which of the following models expresses the general relationship of risks associated with the auditor's evaluation of internal control (CR), study of the business and application of analytical procedures (IR), and overall audit risk (AR), that would lead the auditor to conclude that additional substantive tests of details of an account balance are not necessary? IR CR AR a. 20% 40% 10% b. 20% 60% 5% c. 10% 70% 4.5% d. 30% 40% 5.5%

Answer: A

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? a. The internal auditor did not sign the form. b. The form was mailed by the controller. c. The form was prepared by the internal auditor. d. The account was closed, so the balance was zero.

Answer: B

What type of Evidence(s) is being tested. Inquired of corporate treasurer as to reason(s) for acquiring marketable securities

Answer: Hearsay Evidence

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of: Existence a. Yes b. Yes c. No d. No
Presentation and occurrence disclosure

Yes No Yes No

Answer: B

What type of assertion(s) is being tested. Obtained letter from clients outside legal counsel regarding pending litigation

Answer: Presentation and Disclosure

An auditor suspects that a clients cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the a. Dates checks are deposited per bank statements with dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

Answer: A

What type of assertion(s) is being tested. Confirmed customer accounts receivable

Answer: Existence or Occurrence/ Presentation and Disclosure

In assessing audit risk, the CPA needs to do all of the following except a. Gather audit evidence in support of recorded transactions. b. Obtain an understanding of the client's system of internal control. c. Understand the economic substance of significant transactions completed by the client. d. Understand the entity and the industry in which it operates.

Answer: B

What type of Evidence(s) is being tested. Obtained replies directly from customers concerning the correctness of clients recorded year-end accounts receivable balances

Answer: Confirmatory Evidence

Which of the following tasks should be performed prior to the final audit?

a. Determining the fairness of property, plant, and equipment. b. Confirming accounts receivable. c. Testing internal control. d. Collecting and evaluating evidence supporting the fairness of inventory values.

Answer: c

What type of assertion(s) is being tested. Vouched property additions to underlying documentation consisting of vendors invoices and work orders

Answer: Existence or Occurrence/ Valuation and Allocation

Which of the following may be considered to be a primary objective of the auditor in the examination of accounts receivable? a. Establish validity and collectability of receivables b. Determine approximate time of collectability of receivables c. Determine the relationship of receivables to sales d. Determine the reasonableness of the sales figure

Answer: A

In satisfying the requirements of PSA 82, the auditor must assess the risk of material misstatement due to fraud, develop an appropriate audit response, and ___________ the response.

Answer: Document

Aside from completeness what other type of assertion(s) is being tested. Examined vendors invoices recorded after year-end to determine whether any of these invoices represent liabilities of the client as of year-end

Answer: Rights and obligation

An aged trial balance of accounts receivable is usually used by the auditor to a. b. c. d. Verify the validity of recorded receivables Evaluate the results of compliance tests Ensure that all accounts are prompted credited Evaluate the provision for bad debt expense

Answer: D

What type of assertion(s) is being tested. Selected a sample of bills of lading representing shipments to customers and traced to sales invoices to determine that all shipments have been billed to customers

Answer: Completeness

The reporting standards relate to the function.

Answer: Attest

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the: a. Sales order file. b. Customer order file. c. Shipping document file. d. Sales invoice file.

Answer: C

A preliminary expectation of few errors, followed by subsequent discovery of numerous errors should lead to a in the aggregate materiality threshold.

Answer: Decrease

Client outsourcing of certain accounting functions, such as internal auditing, to the national accounting firms may cause financial statement users to question ___________ _______________.

Answer: Auditors Independence

Which of the following statements is not true regarding the competence of audit evidence? a. Relevance is enhanced by an effective information system. b. To be competent, evidence must be both valid and relevant. c. Validity is related to the quality of the clients information system. d. Relevance must always relate to audit objectives.

Answer: A

The field work standards are concerned with the__________ process.

Answer: Audit

The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the a. Scope paragraph of the auditors report. b. Opinion paragraph of the auditors report. c. Management letter. d. Engagement letter.

Answer: D

The generally accepted auditing standards, as promulgated by the American Institute of Certified Public Accountants, define the ______________ of independent auditing.

Answer: Quality

Competence as a certified public accountant includes all of the following except a. Having the technical qualifications to perform an engagement. b. Possessing the ability to supervise and evaluate the quality of staff work. c. Warranting the infallibility of the work performed. d. Consulting others if additional technical information is needed.

Answer: C

Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards? a. Possession by the auditor of adequate technical training. b. Use of analytical review on audit engagements. c. Use of statistical sampling whenever feasible on an audit engagement. d. Confirmation by the auditor of material accounts receivable balances.

Answer: A

As a guidance for measuring the quality of the performance of an auditor, the auditor should refer to a. Statements of the Financial Accounting Standards Board. b. Generally Accepted Auditing Standards. c. Interpretations of the Statements on Auditing Standards. d. Statements on Quality Control Standards.

Answer: B

The general standards relate to the and of the auditor.

Answer: Character, Competence

The standard of due audit care requires the auditor to a. Apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a decision. b. Ensure that the financial statements are free from error. c. Make perfect judgment decisions in all cases. d. Possess skills clearly above the average for the profession.

Answer: A

A CPA who has never audited a commercial bank a. May not accept such an engagement. b. May accept the engagement only if the accounting firm specializes in the audit of commercial banks. c. May accept the engagement after attaining a suitable level of understanding of the transactions and accounting practices unique to commercial banking. d. May accept the engagement because training as a CPA transcends unique industry characteristics.

Answer: C

The first general standard requires that a person or persons have adequate technical training and proficiency as an auditor. This standard is met by a. An understanding of the field of business and finance. b. Education and experience in the field of auditing. c. Continuing professional education. d. A thorough knowledge of the Statements on Auditing Standards.

Answer: B

In determining estimates of fees, an auditor may take into account each of the following, except the a. Value of the service to the client. b. Degree of responsibility assumed by undertaking the engagement. c. Skills required to perform the service. d. Attainment of specific findings.

Answer: D

What type of Evidence(s) is being tested. Calculated year-end interest accrual and compared with general ledger balance

Answer: Mathematical Evidence

The audit trail consists of that stream of evidence that enables the auditor to trace a transaction or event forward from its inception to the appropriate ledger account, or conversely, vouch a transaction backward from the ledger account to the inception of the transaction or event. For the audit trail to exist, transactions must be .

Answer: Documented

Evidence consisting of everything that can be counted, examined, observed, or inspected is referred to as _____________ evidence.

Answer: Physical Evidence

Which of the following does not describe one of the functions of audit work papers? a. Facilitates third-party reviews. b. Aids in the planning, performance, and review of audits. c. Provides the principal evidential support for the auditor's report. d. Aids in the professional development of the operating staff.

Answer: D

What type of Evidence(s) is being tested. Examined securities purportedly owned by the client and held by local brokers

Answer: Physical Evidence

Which of the following is generally included or shown in the auditor's working papers? a. The procedures used by the auditor to verify the personal financial status of members of the client's management team. b. Analyses that are designed to be a part of, or a substitute for, the client's accounting records. c. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements. d. The manner in which exceptions and unusual matters disclosed by the auditor's procedures were resolved or treated.

Answer: D

What type of Evidence(s) is being tested. Obtained letter from clients outside legal counsel regarding pending litigation

Answer: Confirmation Evidence

During an audit of the accounts receivable function, you found that the accounts receivable turnover rate had fallen from 7.3 to 4.3 over the last three years. What is the most likely cause of the decrease in the turnover rate? a. An increase in the discount offered for early payment. b. A more liberal credit policy. c. A change from net 30 to net 25. d. Greater cash sales.

Answer: B

An auditor who gathers increased quantities of evidence for larger account balances is observing the standard relating to of audit evidence.

Answer: Suficiency

Sales commissions as a percentage of sales declined significantly during the year under audit. Of the following possible causes, the most likely is a. Sales increased during the year. b. The sales force was reduced at the end of the year. c. Sales commission rates were increased at the beginning of the year. d. Fictitious sales were recorded at year-end to inflate earnings. Commissions were not recorded on these sales.

Answer: D

What type of assertion(s) is being tested. Inquired of corporate treasurer as to reasons for buying and holding securities

Answer: Presentation and Disclosure

The two factors that contribute to the probability that unaudited financial statements contain material errors or fraud are and .

Answer: IR and CR

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining a. Whether the predecessor's work should be utilized. b. Whether the company follows the policy of rotating its auditors c. Whether, in the predecessor's opinion, internal control of the company has been satisfactory. d. Whether the engagement should be accepted.

Answer: D

In a recurring audit, the best source of business and industry information may be found in the .

Answer: Permanent File

Warning signs that cause the auditor to question management integrity must be taken seriously and pursued vigorously. Which of the following may lead the auditor to suspect management dishonesty? a. The president and chief executive officer of the client corporation has held numerous meetings with the controller for the purpose of discussing accounting practices that will maximize reported profits. b. The client has been named as a defendant in a product liability suit. c. The client has experienced a decrease in revenue from increased import competition. d. A new federal regulation making customer licenses more difficult to obtain may adversely affect the client's operations.

Answer: A

The financial statement impact of a single error is referred to as ________ __ materiality, whereas the total effect of a series of errors is termed materiality.

Answer: Individual Item, Aggregate

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud? a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter. b. The auditor should design audit procedures that will provide reasonable assurance that the financial statements are free from material misstatement due to errors and/or fraud. c. The auditor must extend auditing procedures to actively search for evidence of fraud where the examination indicates that fraud may exist. d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

Answer: B

Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions, which one does not increase inherent risk? a. The client has entered into numerous related party transactions during the year under audit. b. Internal control over shipping, billing, and recording of sales revenue is weak. c. The client has lost a major customer accounting for approximately 30% of annual revenue. d. The board of directors approved a substantial bonus for the president and chief executive officer, and also approved an attractive stock option plan for themselves.

Answer: B

Which of the following statements concerning materiality thresholds is incorrect? a. Aggregate materiality thresholds are a function of the auditor's preliminary judgments concerning audit risk. b. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold. c. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements is referred to as a "materiality threshold." d. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors.

Answer: B