AUDITING - CHAPTER 7

1. An auditor has determined that the appropriate sample size for a particular audit procedure is 50. Which of the following methods can the auditor use to select the 50 items?

a. Select the 50 items randomly.

b. Select the 50 items with the largest dollar amounts.

c. Select one week and examine the first 50 items.

d. Any combination of the above three methods.

2. Three common types of confirmations used by auditors are (1) negative confirmations, (2) positive confirmations with a request for information, (3) positive confirmations with the information included. If they were placed in the order of their competence, from highest to lowest, the sequence would be

a. 1, 2, 3.

b. 3, 2, 1.

c. 2, 3, 1.

d. 3, 1, 2.

3. Analytical procedures are referred to as "attention-directing" when they highlight

a. areas that need more detailed procedures.

b. areas of improvement.

c. irregularities.

d. errors.

4. Which of the following is an example of objective evidence?

a. A letter written by client's attorney discussing the likely outcome of outstanding lawsuits.

b. The physical count of securities and cash.

c. Inquiries of the credit manager about the collectibility of noncurrent accounts receivable.

d. Observation of cobwebs on some inventory bins.

5. The Auditing Standards Board has concluded that analytical procedures are so important that they are required during

a. planning and testing phases.

b. planning and completion phases.

c. testing and completion phases.

d. planning, testing, and completion phases.

6. Negative confirmations of accounts receivable are less effective than positive confirmations of accounts receivable because when using negative confirmations,

a. they do not produce evidential matter that is statistically quantifiable.

b. the auditor cannot infer that all nonrespondents have verified their account information.

c. some recipients may report incorrect balances that require extensive follow-up.

d. a majority of recipients usually lack the willingness to respond objectively.

7. The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning evidential matter?

a. I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined.

b. I would not undertake that procedure because, at best, the results would only be persuasive and I'm looking for convincing evidence.

c. I evaluate the degree of risk involved in deciding the kind of evidence I will gather.

d. I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.

8. Which of the following statements is not true?

a. A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested.

b. A large sample of evidence that is neither competent nor timely is not persuasive.

c. A small sample of only one or two pieces of relevant, competent, and timely evidence lacks persuasiveness.

d. The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency.

9. An auditor would be least likely to use confirmations in connection with the examination of

a. inventories.

b. long-term debt.

c. property, plant, and equipment.

d. stockholders' equity.

10. Most auditors would consider samples to be insufficient if they contain only the

a. largest dollar items from the population.

b. largest dollar items from a population, even though these items make up a large portion of the total population.

c. items with a high likelihood of misstatement.

d. items that are representative of the population.

11. Which of the following statements regarding analytical procedures is not correct?

a. The definition of analytical tests (SAS 56, AU 318) places the emphasis on the comparison of client's recorded data to GAAP.

b. Analytical procedures are required on all audits.

c. Analytical procedures are required on all review service engagements.

d. For certain accounts with small balances, analytical procedures alone may be sufficient evidence.

12. If most companies in the industry use FIFO inventory valuation and straight-line depreciation, and the audit client uses LIFO and double-declining balance, comparisons of client and industry data

17. A common comparison occurs when the auditor calculates the expected balance and compares it with the actual balance. The auditor's expected account balance may be determined by

a. using industry standards.

b. using Dun and Bradstreet reports.

c. relating it to some other balance sheet or income statement account or accounts.

d. inquiry of client.

18. Ratios that are primarily of a type that bankers and other credit executives use in evaluating whether a company will be able to repay a loan are provided by

a. Dun and Bradstreet.

b. Robert Morris Associates.

c. Value Line.

d. Standard and Poor's Corporation.

19. Which of the following discoveries through the use of analytical procedures would indicate a relatively high risk of financial failure?

a. A decline in gross margin percentages.

b. An increase in the balance in fixed assets.

c. An increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased.

d. A higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets.

20. Evidential matter supporting the financial statements consists of the underlying accounting data and all corroborating information available to the auditor. Which of the following is an example of corroborating information?

a. Minutes of meetings.

b. General and subsidiary ledgers.

c. Accounting manuals.

d. Worksheets supporting cost allocations.

21. Which of the following statements is not correct?

a. The effectiveness of the client's internal control has a significant effect on the competence of most types of evidence.

b. Since the auditor performs the analytical procedures, these will be competent evidence even if internal controls provide inaccurate data.

c. Both physical examination and mechanical accuracy are likely to be highly reliable if the internal control structure is effective.

d. A specific type of evidence is rarely sufficient by itself to provide competent evidence to satisfy any audit objective.

22. Which of the following statements is not correct?

a. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.

b. For certain immaterial accounts, analytical procedures may be the only evidence needed.

c. In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.

d. Analytical procedures use comparisons and relationships to determine which account balances are in error.

23. Those procedures specifically outlined in an audit program are primarily designed to

a. prevent litigation.

b. detect errors or irregularities.

c. test internal systems.

d. gather evidence.

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24. A benefit obtained from comparing client's data with industry averages is that it provides

a. an indication of the likelihood of financial failure.

b. an indication where errors exist in the statements.

c. a benchmark to be used in evaluating client's budgets.

d. a comparison of "what is" with "what should be."

25. For income statement accounts, evidence is more persuasive if the sample comes from

a. the first month of the fiscal period.

b. the last month of the fiscal period.

c. at least three months of the fiscal year.

d. the entire period under audit.

26. Which of the following statements is not correct?

a. It is possible to vary the sample size from one unit to 100% of the items in the population.

b. The decision of how many items to test will not be influenced by the increased costs of performing the additional tests.

c. The decision of how many items to test must be made by the auditor for each audit procedure.

d. The sample size for any given procedure is likely to vary from audit to audit.

27. An example of internal documents is

a. employees' time reports.

b. bank statements.

c. bills of lading for purchases.

d. canceled checks.

28. A document which the auditor receives from the client, but which was prepared by someone outside the client's organization, is a(n)

a. confirmation.

b. internal document.

c. external document.

d. inquiry.

29. "The detailed description of the results of the four evidence decisions for a specific audit" is called an

a. audit procedure.

b. audit program.

c. audit plan.

d. audit guide.

30. When making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified, and to do so

a. no matter what the cost involved in obtaining such evidence.

b. only if the cost is reasonable.

c. at the lowest possible total cost.

d. at any cost because the costs are billed to the client.

31. The primary purpose of performing analytical procedures in the testing phase of an audit is to

a. help the auditor obtain an understanding of the client's industry and business.

b. assess the going concern assumption.

c. indicate possible misstatements (attention directing).

d. reduce detailed tests.

32. Evidence is generally considered competent when

a. it has been obtained by random selection.

b. there is enough of it to afford a reasonable basis for an opinion on financial statements.

c. it has the qualities of being relevant, objective, and free from known bias.

d. it consists of written statements made by managers of the enterprise under audit.

33. In determining the quantity and quality of evidence to gather, the auditor will be satisfied when the evidence is

a. irrefutable.

b. conclusive.

c. highly persuasive.

d. completely convincing.

34. Physical examination is the inspection or count by the auditor of items such as

a. cash or inventory only.

b. cash, inventory, canceled checks, and sales documents.

c. cash, inventory, canceled checks, and tangible fixed assets.

d. cash, inventory, securities, notes receivable, and tangible fixed assets.

35. The audit program usually states all four of the choices below, but it always includes the

a. audit procedures.

b. sample sizes.

c. particular items to select.

d. timing of the tests.

36. "Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor" is a definition of

a. analytical procedures.

b. tests of transactions.

c. tests of balances.

d. auditing.

37. When the current year's unaudited trial balance is compared to the prior year's audited trial balance,

a. errors become apparent.

b. irregularities become apparent.

c. changes become apparent.

d. discrepancies become apparent.

38. The auditor is concerned that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to

a. select a sample of duplicate sales invoices and trace each to related shipping documents.

b. trace a sample of shipping documents to related duplicate sales invoices.

c. trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger.

d. compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.

39. When a higher than normal ratio of long-term debt to net worth is coupled with a lower than average ratio of profits to total assets, the company

a. is highly successful.

b. is comparable with industry standards.

c. has a high risk of financial failure.

d. has a liquidity problem.

40. The Securities and Exchange Commission (SEC) requires that all public companies file audited financial statements with the SEC

a. within 30 days of the companies' fiscal year-end.

b. within three months of the companies' fiscal year-end.

c. within six months of the companies' fiscal year-end.

d. within one year of the companies' fiscal year-end.

41. Most auditors prefer to replace tests of details with analytical procedures whenever possible because

a. the analytical procedures are more reliable.

b. the tests of details are more expensive.

c. the analytical procedures are more persuasive.

d. the tests of details are more difficult to interpret.

42. Unusual fluctuations occur when

a. significant differences are not expected but do exist.

b. significant differences are expected but do not exist.

c. significant differences are expected and do exist.

d. either a or b is true.

43. When an analytical procedure reveals no unusual fluctuations, the implication is that

a. there are no material errors or irregularities.

b. there are no material errors.

c. there are no material irregularities.

d. the possibility of a material error or irregularity is minimized.

44. Competence of evidence is also referred to as

a. reliability of evidence.

b. relevance of evidence.

c. sufficient of evidence.

d. all three of the above.

45. Physical examination of assets is not a sufficient form of evidence when the auditor wants to determine the

a. existence of the asset.

b. quantity and description of the asset.

c. condition or quality of the asset.

d. ownership of the asset.

46. Which of the following is not one of the major types of analytical procedures?

a. Compare client with industry averages.

b. Compare client with prior year.

c. Compare client with budget.

d. Compare client with SEC averages.

47. Which of the following statements about the competence of evidence is not correct?

a. Competence can be improved by selecting a larger sample size.

b. Competence deals only with the audit procedures selected.

c. Competence can be improved by selecting audit procedures that contain a higher quality of the characteristics sought.

d. Competence cannot be improved by selecting different population items to include in the sample size.

48. The most common statistical technique for analytical procedures is

a. analysis of variance.

b. bell-curve analysis.

c. time-series analysis.

d. regression analysis.

49. Which of the following organizations publishes accumulated financial information for thousands of companies and compiles the data for different lines of businesses?

a. Securities and Exchange Commission.

b. New York Times.

c. Wall Street Journal.

d. Dun & Bradstreet.

50. Traditionally, confirmations are used to verify

a. individual transactions between organizations, such as sales transactions.

b. bank balances and accounts receivables.

c. fixed asset additions.

d. all three of the above.

51. Which one of the following is not one of the characteristics of competent evidence?

a. Independence of provider.

b. Effectiveness of internal control structure.

c. Size of the sample.

d. Degree of objectivity.

52. Which of the following forms of evidence would be least persuasive in forming the auditor's opinion?

a. Responses to auditor's questions by the president and controller regarding the investments account.

b. Correspondence with a stockbroker regarding the quantity of client's investments held in street name by the broker.

c. Minutes of the board of directors authorizing the purchase of stock as an investment.

d. The auditor's count of marketable securities.

53. Which of the following statements is not true? "The evidence-gathering technique of inquiry

a. cannot be regarded as conclusive."

b. requires the gathering of corroborative evidence."

c. is the auditor's principal method of evaluating the client's internal control."

d. does not provide evidence from an independent source."

54. Which one of the following forms of evidence would be most reliable?

a. An insurance policy in client's file.

b. The file copy of a purchase requisition.

c. The file copy of a receiving room report.

d. The file copy of a sales invoice.

55. An example of vouching would be to

a. trace from receiving reports to the acquisitions journal.

b. trace from the acquisitions journal to supporting vendors' invoices.

c. trace from duplicate bank deposit slips to the cash receipts journal.

d. trace from canceled checks to the cash disbursement journal.

56. An important benefit of industry comparisons is as

a. an aid to understanding the client's business.

b. an indicator of errors.

c. an indicator of irregularities.

d. a least-cost indicator for audit procedures.

57. Which of the following statements is an incorrect use of the terminology?

a. Evidence obtained from an independent source outside the client organization is more reliable than that obtained from within.

b. Documentary evidence is more reliable when it is received by the auditor directly from an independent third party.

c. Documents that originate outside the company are considered more reliable than those that originate within the client's organization.

d. External evidence, such as communications from banks, is generally regarded as more reliable than answers obtained from inquiries of the client.

58. Evidence is usually more persuasive for balance sheet accounts when it is obtained

a. as close to the balance sheet date as possible.

b. only from transactions occurring on the balance sheet date.

c. from various times throughout the client's year.

d. from the time period when transactions in that account were most numerous during the fiscal period.

59. One feature common to all microcomputer-based audit software is

a. the ability to input client's general ledger into the auditor's computer system.

b. the ability to input auditor's software into client's computer system.

c. the inclusion of an industry database to facilitate analytical review procedures.

d. DOS-based command systems.

60. Which one of the following statements is not true? "The evidence gathering technique of observation

a. is useful in most parts of the audit."

b. is rarely sufficient by itself."

c. is limited to what the auditor sees."

d. requires the gathering of corroborative evidence."

61. When the auditor is gathering evidence, if the source of the evidence is independent of the client, the auditor will conclude that the evidence is

a. not reliable.

b. reliable.

c. not reliable unless the provider is qualified to provide the evidence.

d. reliable if the provider has no reason to be biased.

62. Which of the following types of evidence is rarely sufficient by itself to provide competent evidence to satisfy any audit objective?

a. Observation.

b. Inquiries of client.

c. Analytical procedures.

d. All of the above.

63. The third standard of fieldwork requires the auditor to accumulate sufficient competent evidence to support the opinion issued. Because of the nature of audit evidence, it is

a. unlikely the auditor will be completely convinced that the opinion is correct.

b. likely the auditor will be completely convinced that the opinion is correct.

c. unlikely the auditor will arrive at a conclusion.

d. likely that the auditor would change his/her mind about the opinion if he/she took the time to gather additional evidence.

64. Which of the following forms of evidence is least reliable?

a. Positive confirmation of customer's balance.

b. Monthly bank statement.

c. Client's file copy of a purchase requisition.

d. A letter from the client's attorney stating that there are no known lawsuits pending against the client.

65. Evidence obtained directly by the auditor is more competent than information obtained indirectly. Which of the following is not an example of the auditor's direct knowledge?

a. Physical examination.

b. Observation.

c. Computation.

d. Inquiry.

66. When an auditor calculates the gross margin as a percent of sales and compares it with previous periods, this type of evidence is called

a. physical examination.

b. computation.

c. observation.

d. inquiry.

67. Evidence obtained directly by the auditor will not be reliable if

a. the auditor lacks the qualifications to evaluate the evidence.

b. it is provided by the client's attorney.

c. the client denies its veracity.

d. it is impossible for the auditor to obtain additional corroboratory evidence.

68. For a given audit procedure, the evidence obtained from a sample of 200 would ordinarily be

a. more sufficient than from a sample of one hundred.

b. less sufficient than from a sample of one hundred.

c. more competent than from a sample of one hundred.

d. less competent than from a sample of one hundred.

69. The distinction between physical examination of assets and examination of documents is dependent on the item being examined. If the object being examined has no inherent value, the evidence is called

a. physical examination.

b. documentation.

c. confirmation.

d. garbage.

70. Confirmations are a highly regarded and often-used type of evidence because they

a. come from an independent source.

b. cause no inconvenience for the auditor or third party.

c. are inexpensive.

d. all of the above.

71. Distinguish between internal documentation and external documentation as types of audit evidence. Give two examples of each. Which type is considered more reliable?

ANSWERS

1 - 10. d, c, a, b, b, b, b, d, c, a

11 - 20. a, d, c, d, d, b, c, b, d, a

21 - 30. b, d, d, a, d, b, a, c, b, c

31 - 40. d, c, c, d, a, a, c, b, c, b

41 - 50. b, d, d, a, d, d, a, d, d, b

51 - 60. c, a, c, a, b, a, b, a, a, c

61 - 70. c, d, a, c, d, b, a, a, b, a

71. Internal documentation involves the auditor's examination of documents that have been prepared and used within the client's organization and are retained without ever going to an outside party. Examples would include duplicate sales invoices, employees' time reports, and inventory receiving reports.

External documentation involves the auditor's examination of documents that have been in the hands of someone outside the client's organization. Examples include vendors' invoices, cancelled checks, cancelled notes payable, and insurance policies.

External documents are regarded as more reliable evidence than internal documents.