Substantive Tests 1 Which of of the following following statements statements is most corre correct ct regarding regarding the primary primary purpose purpose of audit audit procedure procedures? s? a To detect detect all err errors ors or fraud fraudulen ulentt activitie activities s as well well as illega illegall activitie activities s b To com compl ply y wit with h the the SEC SEC c To gather corrob corroborat orative ive audit audit evidence evidence about manage management ment asserti assertions ons regardin regarding g the clients clients fnancial fnancial statements d To determine determine the the amount amount of errors errors in the balance balance sheet sheet accounts accounts in order order to adjust adjust the accounts accounts to actual 2 procedur procedure e designed designed to test for moneta monetary ry misstateme misstatements nts directly directly a!ecti a!ecting ng the validity validity of the "nancia "nanciall statements balances is a# a Test of co contr ntrols ols b Substantive test c Test of attri tribute utes d $one $oneta tary ry%u %uni nitt sam sampl plin ing g test test & 'elow are are the the "ve types of tests which which auditors auditors use to determine determine whether whether the the "nancial "nancial statements statements are are fairly fairly stated( Which three are substantive test? 1 )is* )is* asse assess ssme ment nt proc proced edur ures es 2 Tests ests of co contro trols & Tests ests of tran transa sact ctio ion n + nal nalyt ytic ical al proc proced edur ures es , Tests ests of of det detai ails ls of bala balanc nces es a 1-2 and & b 3,4 and 5 c 2-& and , d 2-& and + + Whic Which h of of the the foll follow owin ing g is is tru true? e? a Tests o details balances ocus o o the ending balances o accounts accounts in in the client’s trial balance. balance. b Test s of detail details s of balance balances s focus focus on the trans transacti actions ons durin during g the period period(( c Tests of detail details s of balances balances focus focus on the audit auditor. or.s s understan understanding ding of inter internal nal contro controls( ls( d Tests of details details of balances balances focus focus on compariso comparisons ns of recorded recorded amounts amounts to e/pectatio e/pectations ns develope developed d by the auditor( , 0n the conte/ conte/tt of an audit audit of "nancia "nanciall statement statementss- substanti substantive ve test are are audit audit procedur procedures es that a $ay $ay be elimin eliminate ated d under under certai certain n condi conditio tions( ns( b re designe designed d to discover discover signi"ca signi"cant nt subse subseue uent nt event events( s( c May be eithe eitherr tests o o transact transaction, ion, direc directt test o fnanc fnancial ial balan balances, ces, or or analytic analytical al tests. tests. d Will Will increase increase prop proporti ortionat onately ely with with the auditor auditor.s .s assessme assessment nt of contro controll ris*( ris*( The prima primary ry empha emphasis sis iin n most most test test of detai details ls of balances balances is on on the# the# a Bala Balanc nce e shee sheett acco accoun unts ts b )ev en enue ac accounts c Cash Cash 3ow 3ow stat statem emen entt acco accou unts nts d E/pense ac accounts 4 Evidence Evidence is is usually usually more more persuasi persuasive ve for for balance balance sheet sheet account accounts s when when it is obtain obtained# ed# a As clo close se to to the the bala balance nce sheet sheet date date as oss ossib ible. le. b 5nly from from transa transactio ctions ns occur occurring ring on the the balan balance ce sheet sheet date( date( c6rom various times throughout the client.s year( d 6rom 6rom the time period period when when transactions transactions in that account were most numerous numerous during the "scal "scal period( period( 7 8The 8The use of compa comparis rison ons s and relati relation onshi ships ps to asses assess s wheth whether er account accounts s balan balances ces or other data data appea appearr reasonable compared to the auditor.s e/pectations9 is a de"nition of# a Anal Analyt ytic ical al roce rocedu dure res s b Tests ests of tran transa sact ctio ions ns c Test of balan lances ces d uditing : 5ften 5ften-- audit auditor or proce procedur dures es signi signi"ca "cant nt di!er di!erenc ences es being being discove discovere red d by the auditor auditor (The audi auditor tor should should investigate further if# Signi"cant di!erences are not Signi"cant di!erences are e/pected but do e/ist e/pected but do not e/ist a !es !es b ;o ;o c
1= nalytical procedur procedures es are reuired reuired to be performed performed during which which phase>s of the audit? audit? @lanning Test of Control Completion a !es "o !es b
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a nalytical procedures are more reliable( b Analytical rocedures are considerably less e#ensive. c nalytical procedures are more persuasive( d Tests of details are more diAcult to interpret( Which of the following statements is not correct? a nalytical procedures are use to isolate accounts or transactions that should be investigated more e/tensively( b $or certain immaterial accounts, analytical rocedures may be the only evidence needed. c 0n some instances- other types of evidence may be reduce when analytical procedures indicate that an account balance appears reasonably( d nalytical procedures use supporting documentation to determine which account balances need additional detailed procedures( Which of the following is correct with respect to the use of analytical procedures? a nalytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption( b nalytical procedures must be used throughout the audit( c Analytical rocedures used in the testing hase o the audit are rimarily used to direct an auditor’s understanding o the business imroved. d nalytical procedures are performed by studying plausible relationships between "nancial and non"nancial data( Which of the following statements concerning analytical procedures is correct? a nalytical review may be omitted entirely for some "nancial statements audits( b nalytical procedures use in planning an audit should not use non%"nancial information( c nalytical procedures usually e!ective and eAcient for tests controls( d Analytical rocedures alone may rovide the aroriate level o assurance or some assertions. 5f the following procedures- which does not produce analytical evidence? a Compare revenue- cost of sales- and gross pro"t with the prior year and investigate signi"cant variations b E/amine monthly performance reports and investigate signi"cant revenue and e/pense variances c %onfrm customer’s accounts receivable and clear material e#cetions d Compare sales trends and pro"t margins with industry averages and investigate signi"cant di!erences Which of the following comparisons is most useful to an auditor in evaluating the results of an entity.s operations? a @rior year accounts payable to current year accounts payable b @rior year payroll e/pense to budgeted to current year payroll e/pense c %urrent year revenue to budgeted current year revenue d Current year warranty e/pense to current year contingent liabilities Which of the following analytical procedures- should be applied to the income statement? a Select sales and e/pense items and trace amounts to related supporting documents b scertain that the new income amount in the income statement cash 3ows agrees with the net income amount in the income statement c 5btain from the clients representatives- the beginning and ending inventory amounts that were use to determine costs of sales d %omare the actual revenues and e#enses &ith the corresonding fgures o the revious year and investigative signifcant di'erence Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests? a )elationship involving balance sheets accounts( b Transactions subject to management discretion( c (elationshis involving income statement accounts. d Bata subject to audit testing in the prior year( uditors try to identify predictable relationships when using analytical procedures( )elationship involving transactions from which of the following accounts most li*ely would yield the highest level of evidence? a ccounts payable c( ccounts receivable b dvertising e/pense d. )nterest e#ense uditors sometimes use of comparison ratios as audit evidence( 6or e/ample- an une/plained decrease in the ratio of gross pro"t to sales may suggest which of the following possibilities? a nrecorded purchases b *nrecorded sales c $erchandise purchases being charges to operating e/pense d 6ictitious sales Which result of analytical procedure suggests the e/istence of obsolete merchandise? a Becrease in the inventory turnover rate b Becrease in the ratio of gross pro"t to sales c Becrease in the ratio of inventory to accounts payable d +ecrease in the ratio o inventory to accounts receivable 0f accounts receivable turned over 7 times in 2=1+ as compared to only times in 2=1,- it is possible that there were a nrecorded credit sales in 2=1,
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b nrecorded cash receipt in 2=1+ c $ore thorough credit investigations made by the company late in 2=1+ d $ictitious in -5 Which of the following would not be classi"ed as an analytical procedure? a 'enchmar*ing the company.s pro"tability ratio against other industry( b Dariance analysis of actual versus budgeted amounts for production( c )eforming the client.s depreciation e/pense using the client.s accounting policies for capital e/penditures made during the year( d (econciling f#ed asset disositions &ith the f#ed asset ledger. Which of the following statements is not correct with respect to analytical procedures? a Auditing standard re/uire the use o analytical rocedures. b nalytical procedures may be performed as substantive test( c nalytical procedures may be performed as test of control( d nalytical procedures use comparisons and relationship to assess whether accounts balances appear reasonable( n auditor compares this year.s revenues and e/penses with those of the prior year and investigates all changes e/ceeding 1=( 'y this procedure the auditor is most li*ely to learn that a n increase in property ta/ rates has not been recogniFed in the client.s accrual( b This year.s provision uncollectable account is inadeuate because of worsening economic conditions( c Becember payroll ta/es were not paid( d The client’s change its caitali0ation olicy or small tools during the year. When performing planning analytical procedures for a client the auditor detected that the gross pro"t percentage had declined by ,= from the previous year to the year currently under audit( The auditor should# a )nvestigate the ossibility the client may have made an error in their cost o goods sold comutation. b ssist management in developing greater costs eAciencies in their product line( c @repare a going concern opinion for the client( d dvise the client to have e/tensive disclosure to alleviate investor concerns( Con"rmation would almost always be used- assuming all the accounts below are material- for# a 0ndividual transactions between organiFations- such as sales transactions b Ban1 balances and accounts receivable c 6i/ed asset additions d @ayroll e/penses
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c @ertinence of the evidence( d 7udgment o the auditor. Betermine which of the following is most correct regarding the reliability of audit evidence a 0nformation that is indirectly obtained from e/ternal sources is the most reliable audit evidence b )eliability of the audit evidence is dependent upon the evidence being convincing c )eliability of evidence refers to the amount of evidence obtained d An e'ective internal control system rovides more reliable audit evidence n e/ample of e/ternal document that provides reliable information for the auditor is# a Employees time reports b Ban1 statements c @urchase order for company purchase d Carbon copies of chec*s n e/ample of document auditor receive from the client- but which was prepared by someone outside the client.s organiFation- is a# a Con"rmation b Sales invoice c endor invoice d 'an* reconciliation Which of the following is the most reliable type of evidence? a written representation signed by the entity.s C65 b The hysical counts o securities and cash c 0nuires of the credit manager about the collectability of noncurrent accounts receivable d 5bservation of cobwebs on some inventory bins Which of the following statements is generally correct about appropriateness of evidential matter? a The auditor’s direct ersonal 1no&ledge, obtained through observation and insection, is more ersuasive than inormation obtained indirectly rom outside sources. b To be appropriate- evidential matter must be either reliable or relevant- but need not be both( c ccounting data alone may be considered suAcient appropriate evidential matter to issue an unuali"ed opinion of "nancial statements( d ppropriateness of evidential matter refers to the amount of corroborative evidence to be obtained( 6or audit evidence to be compelling to the auditor it must be suAcient and appropriate( Which statement below does not relate to the appropriateness of audit evidence? a The more e!ective the internal control system- the more assurance it provides the auditor about the reliability "nancial reporting by the client( b An auditor oinion, to be economically useul and roftable to the auditing frm needs to be ormed &ithin a reasonable time and based on evidence obtained that assures rofts or the auditing frm. c Evidence obtained from independent sources outside the entity is generally more reliable than evidence secured solely within the entity( d The independent auditor.s direct personal *nowledge- obtained through inuiry- observation and inspection- is generally more persuasive than information obtained indirectly( Which of the following procedures would provide the most reliable audit evidence? a 0nuiries of the client.s internal audit sta! held in private b 0nspection of prenumbered client purchase orders "eld in the voucher payable department c nalytical procedures performed by the auditor on the entity.s trial balance d )nsection o ban1 statements obtained directly rom the client’s fnancial institution Which of the following forms of evidence would be least persuasive in forming the auditor.s opinion about trading securities and other investments held by the company? a )esponses to auditor.s uestions by the president and the controller regarding investment account( b Correspondence with a stoc*bro*er regarding the uantity of client.s investments held by the bro*er( c Minutes o the board o directors authori0ing the urchase o stoc1 as an investment. d The auditor.s count of mar*etable securities( 0n determining validity of accounts receivable- which of the following would the auditor consider to the most reliable? a Bocumentary evidence that supports the accounts receivable balance( b Credits to accounts receivable from the cash receipt boo* after the close of business at the year% end( c Birect telephone communication between auditor and debtor( d %onfrmation relies received directly rom customers. Which of the following statement is not a correct use of the terminology in relation to audit evidence? a Evidence obtained from an independent source outside the client organiFation is more reliable than that obtained from within( b +ocumentary evidence is more reliable &hen it is received by the auditor indirectly rather than directly. c Bocuments that originate outside the company is considered more reliable than those that originate within the client.s organiFation( d E/ternal evidence- such as communications from ban*s- is generally regarded as more reliable than the answers obtained from inuiries of the client( Which of the following is not a characteristic of the appropriateness of evidence? a E!ectiveness of client internal control
b ducation o auditor c 0ndependence of information provider d Timeliness ,4 Which of the following types of audit evidence is the least persuasive? a @renumbered purchase order forms( b Ban1 statements obtained rom the client. c Test counts of inventory performed by the auditor( d Correspondence from the client.s attorney about litigation( ,7 udit evidence has two primary ualities for the auditor- relevance and reliability( Given the choices below which provides the auditor with the most reliable audit evidence? a general ledger account balances b confrmation o accounts ayable balance received rom a vendor c internal memo e/plaining the issuance of a credit memo d copy of month%end adjusting entries ,: Given the audit procedures below- which one provides the most reliable evidence about the validity of accounts receivable balance? a %onfrmations b )ecalculat ion c )eperformance d 5bservations = udit evidence obtained directly by the auditor will not be reliable if# a The auditor lac1s the cometence to evaluate the evidence. b 0t is provided by the client.s attorney( c The client denies its veracity( d 0t is impossible for the auditor to obtained additional corroboratory evidence( 1 To be considered reliable evidence con"rmations must be controlled by# a client employee responsible for account receivable b A fnancial statement auditor c client.s internal audit department d client.s controller or C65 2 Given the economic and time constraints in which auditors can collect evidence about management assertions about the "nancial statements- the auditor normally gathers the evidence that is# a 0rrefutable( b Conclusive( c 8ersuasive. d Completely convincing( & When ma*ing decisions about evidence for a given audit- the auditor.s goal is to obtain a suAcient amount of timely- reliable evidence that is relevant to the information being veri"ed( 0n addition- the goal of audit eAciency is to gather and evaluate of the information# a ;o matter the cost is involved in obtaining such evidence( b Even if cost is irrelevant to the auditor- because they bill the client foer costs incurred( c At the lo&est ossible total cost. d t the cost suggested in the engagement letter( Wor*ing papers + 0t refers to the material >wor*ing papers prepared by and for- or obtained and retained by the auditor in connection with the performance of the audit( a Bocumentation b udit report c ccounting data d %orroborative evidence , Which of the following best describes one of the primary objectives of audit documentation? a Befend against claims of de"cient audit( b @rovide a principal support for the income ta/ return( c 8rovide documentation that the audit &as conducted in accordance &ith auditing standards. d @rovide additional support of recoded amounts to the client( Which one of the following is not one of the primary purposes of audit documentation prepared by the audit team? a basis for planning the audit( b A record o the evidence accumulated and the results o the tests. c basis for review by the supervisors and partners( d basis for determining wor* de"ciencies by peer review teams( 4 Which of the following statement is incorrect about the wor*ing papers prepared by the auditor? a The auditor should record in the wor*ing papers information on planning the audit the audit wor*the nature- timing- and e/tent of the audit procedures performed- the results thereof- and the conclusions reached from the audit evidence obtained( b The e/tent of wor*ing paper documentation is a matter of professional judgment( c 2or1ing aers should be in the orm on data stored on aer. d Wor*ing papers should be designed and organiFed to meet the circumstances and the auditor.s need for each individual audit(
7 Which of the following statement is correct about the wor*ing papers? a Wor*ing papers should not include documentation prepared by the client( b Every matter the auditor considers in an audit must be documented in the wor*ing papers( c 0n determining the e/tent of the wor*ing paper documentation- it may be useful to consider what would be necessary to provide another auditor has no previous e/perience with the audit an understanding of the detailed aspects of the audit( d The auditor should prepare wor*ing papers which are suAciently complete and detailed to provide an overall understanding of the audit( : Which one of the following is not one of the primary purposes of wor*ing papers? a To assist in planning and performance of the audit( b To assist in the supervision and review of wor*( c To record the audit evidence resulting from the audit wor* performed to support the auditor.s opinion( d To substitute the clients accounting records. 4= n auditor.s wor*ing paper serve mainly to a 8rovide the rincial suort or the auditor’s reort. b Satisfy the auditor.s responsibilities concerning the Code of @rofessional Ethics( c $onitor the e!ectiveness of the C@ 6irm.s uality control procedures( d Bocument the level of independence maintained by the auditor( 41 Which of the following statements concerning wor*ing papers is incorrect? a n auditor may support an opinion by other means in addition to wor*ing papers( b The form of wor*ing papers should be designed to meet the circumstances of a particular engagement( c An auditor’s &or1ing aers may not serve as a reerence source or the client. d Wor*ing papers should show that the internal accounting control system has been studied and evaluated to the degree necessary( 42 Which of the following factors most li*ely a!ects the auditor.s judgment about the uantity- type- and content of wor*ing papers? a The nature and conditions of the client.s accounting and internal control systems b The continent o the client’s reresentation letters c The timing of substantive test completed prior to the balance sheet date d The usefulness of the wor*ing papers as reference source for the client 4& Which of the following is not a factor that a!ects the independent auditor.s judgment as to the uantitytype- and continent of wor*ing papers? a The timing and the number of personnel to be assigned to the engagement b The nature of engagement c The need for supervision of the engagement d $orms o the reort 4+ n auditor.s wor*ing papers will generally not include documentation showing how the a %lient’s schedule &ere reared b Engagement has been planned c Client.s system of internal control had been reviewed and evaluated d nusual matters were resolved 4, Bue care in the matter of audit documentation reuires that the audit documentation of the evidence gathered by the auditors meets which of the following criteria? a Wor*ing papers be inde/ed to the general ledger accounts and include both a permanent "le and a general "le b The content be su9cient to rovide suort or the auditor’s oinion, including the auditor’s reresentation as to comliance &ith auditing standards c udit evidence is principally gathered to determine if the client.s "nancial statements- as prepared by management - can be relied upon to ma*e managerial decisions about the "rm d udit evidence as displayed in the wor* papers in the primarily perform to protect the auditing "rm in the case of a lawsuit by investors 4 udit "les that are updated with new information of continuing importance is called a Current "les c. 8ermanent fles b Wor*ing paper "le d( Correspondence "le 44 Which of the following statements about wor*ing papers is correct? a 2or1ing aers are not ermitted to be use as a reerence source by the client. b The auditors should document the understanding of the client.s internal control obtained to plan the audit( c Wor*ing papers may regarded as a substitute for the client.s accounting records( d When reporting on comparative "nancial statements- the independent auditor may discard wor*ing papers after two years( 47 @S 2&= provides general guidelines about the ownership- custody and con"dentiality of wor*ing papers( ccordinglya 2or1ing aers are ersonal roerty o the auditor and the client has no rights to the &or1ing aer reared by the auditor. b The wor*ing papers should retained by the auditor for a suAcient period of time but not to e/ceed "ve years( c Wor*ing papers should not be made available to the client(
d Wor*ing papers may be considered a substitute for the client.s accounting records( 4: Wor*ing papers would not include a 0nformation concerning the legal and organiFational structure of the entity( b Ietters of the representation received from the entity( c Copies of the "nancial statements and the auditor.s report( d +ocumentation sho&ing ho& the client’s schedules are reared. 7= The permanent >continuing "le of an auditor.s wor*ing papers most li*ely would include copies of the a 'an* statements c. +ebt agreement b Iead schedules d( ttorney.s letters 71 lthough the uantity and the content of the audit wor*ing papers vary with each particular engagementan auditor.s permanent "les most li*ely include a Schedules that support the current year.s adjustment entries b @rior years accounts receivable con"rmations that were classi"ed as e/ceptions c Bocumentation indicating that the audit wor* was adeuately planned and supervised d Analysis o caital stoc1 and other o&ners e/uity accounts 72 The permanent "le of the auditor.s wor*ing papers generally would not include a 'ond indenture agreements b 2or1ing trial balance c Iease agreements d 6lowchart of the internal control structure 7& The current "le of the auditor.s wor*ing papers generally should include a 3owchart of the internal accounting controls b A coy o the fnancial statements c 5rganiFation charts d Copies of bond and note indentures 7+ The current "le of an auditor.s wor*ing papers most li*ely would include a copy of the a Ban1 reconciliation b rticles of incorporation c @ension plan contact d 6lowchart of the internal control procedures 7, 6or what minimum period should audit wor*ing papers be retained by the independent C@? a 6or the period during which the entity remains the client of the independent C@ b 6or the period during which an auditor%client relationship e/ists but not more than si/ years c $or the statutory eriod &ithin &hich legal action may be brought against the indeendent %8A d 6or as long as the C@ is in public practice 7 Which of the following statements about wor*ing papers is correct? a Wor*ing papers may be permitted to be use as a reference source by a client( b The auditor should document the bias or assessing control ris1 at the ma#imum level. c Wor*ing papers provide principal support for the "nancial statements( d The independent auditor may discard wor*ing papers after two years( 74 Which statements is correct concerning the deletion of audit documentation? a Superseded audit documentation should always be deleted from the audit "le( b Ater the audit has been comleted, the auditor should not delete or discard audit documentation. c uditors should use professional s*epticism in determining which audit documentation should be deleted( d udit documentation should never be deleted from the audit "le( 77 0gnoring any particular legal or regulatory reuirement audit documentation should be retained a A minimum o fve years b s long as leads schedules have relevance to forthcoming audits c ntil & years after the client selects another auditor d Wor*ing papers must be maintained inde"nitely 7: What client information is needed by auditors in creating lead schedules? a 0nterim statements prepared by the client b :eneral ledger inormation, including unad;usted ending balance and beginning balances or accounts c schedule of adjusting entries made by the client for all balance sheets accounts d Betailed transaction information that may e/plain the changes in balance sheet accounts for the current year under audit := udit documentation should posses certain characteristics( Which of the following is true regarding those characteristics? 0 udit documentation should be inde/ed and crossed%referenced 00 udit documentation should be organiFed to bene"t the client.s sta! a 'oth statements are true b 'oth statements are false c 6tatement ) is true but 6tatement )) is alse d Statement 0 is false but Statement 00 is true :1 The main advantage of properly inde/ed wor*ing papers is to a )educe the siFe of the "le b Better organi0e the &or1ing aers c llow division of the labor within the audit team
d 6acilitate the eAcient use of audit sta! :2 Buring the wor*ing paper review- an audit supervisor "nds that the auditor.s reporters "nding are not adeuately cross%referenced to supporting documentation( The supervisor will most li*ely instruct the auditor to a @repare a wor*ing paper to indicate that the full scope of the audit was carried out( b 6amiliariFe himJherself with the seuence of wor*ing papers so that he>she will be able to answer uestions about the conclusions stated in the report( c Eliminate any cross%references to other wor*ing papers since the system is unclear( d 8rovide a &or1 aer inde#ing system that sho&s the relationshi bet&een fndings, conclusions, and related acts. :& The principal purpose for cross%inde/ing audit wor*ing papers is to a Give the wor*ing papers a professional appearance( b E/plain the use of tic* mar*s( c @rovide e/planation of the audit steps performed( d 8rovide a trail or the auditor and the revie&er. :+ udit documentation must contain suAcient information to allow what type of auditor to understand the nature- timing- e/tent- and results of procedures performed? a n e/perience audit team member b An e#erience auditor having no revious connection &ith the engagement c ny certi"ed public accountant d n editor uali"ed as a peer review specialist ccounting estimates :, 0t is an appro/imation of the amount of an item in the absence of a precise means of measurement a Accounting estimate c( $ateriality b udit sampling d( udit ris* : 0n evaluating the reasonableness of an accounting estimate- an auditor most li*ely would concentrate on *ey factors and assumption that are a Consistent with prior periods b Similar to industry guidelines c Based on ob;ective assumtion d )easonable in the circumstance :4 0n evaluating an entity.s accounting estimates- one of an auditor.s objectives is to determine whether the estimate are a ;ot subject to bias b Consistent with industry guidelines c 'ased on objective assumption d (easonable in the circumstance :7 The auditor should adopt one or a combination of the following approaches in the audit of an accounting estimates are 0 )eview and test the process use by management to develop the estimate 00 se an independent estimate for comparison with that prepared by management 000 )eview subseuence events which con"rm the estimate made a Any o the above c( Either 0 or 00 b;one of the above d( 0 only :: 0n evaluating the assumptions on which the estimate is based- the auditor would need to pay particular attention to assumptions which are a (easonable in the light o actual results in rior eriods. b Consistent with those used for other accounting estimates( c Consistent with management.s plans which appear appropriate( d Subjective or susceptible to material misstatements( 1== Which of the following statements is incorrect about accounting estimates? a $anagement is responsible for ma*ing accounting estimates included in the "nancial statements( b The ris* of material misstatements is greater when accounting estimates are involved( c The evidence available to suort an accounting estimate &ill oten be more di9cult to obtained and less conclusive than evidence available to suort other items in the fnancial statements. d When evaluating accounting estimates- the auditor should pay particular attention to assumptions that are objective and consistent with industry patterns( 1=1 Which of the following would an auditor generally perform to obtain assurance that accounting estimates are properly accounted for and disclosed? a 0nuiry management b $a*e an independent estimate for comparison with client.s estimate c (evie& subse/uent events d 5btain *nowledge about the applicable "nancial reporting standards related to the accounting estimate 1=2 Which of the following procedures would an auditor least li*ely perform when evaluating the reasonableness of management.s estimates? a $a*e an independent estimates for comparison with management estimates b (ead the minutes o the board o directors < meeting c )eview and test the process used by management d )eview subseuent events which con"rm the estimates made
1=& Which of the following procedures would an auditor ordinarily perform "rst in evaluating management.s accounting estimates for reasonableness? a Bevelop independent e/pectations of management.s estimates( b %onsider o the aroriateness o the 1ey actors or assumtion used in rearing the estimates. c Tests the calculation used by the management in developing the estimates( d 5btain an understanding of how management developed its estimates( )elated parties 1=+ Which of the following is not one of the primary reasons why auditor should be aware of related parties and transactions between such parties? a @6)S reuires disclosure of the related party transactions if they are material( b The e/istence of related parties or related party transactions may a!ect the "nancial statements and the reliability of audit evidence( c related party transaction may be motivated by other than ordinary business considerations( d 8$(6 re/uires that related arty transactions be recorded in their e/uivalent arm’s=length transaction. 1=, The primary concern of the auditor regarding related party transactions is that a They are reported to proper regulatory authorities because there are illegal( b Their form be emphasiFed rather than their economic substance( c Their e#istence and signifcance be ade/uately disclosed. d Their e!ects are eliminated from the "nancial statements( 1= The auditor determines that Kin Company occupies the & rd 3oor of an oAce tower for which it pays no rent( The most li*ely e/planation is# a They got luc*y the landlord hasn.t noticed the lac* of payments b Iandlord has wea* internal controls over billings c (elated arty transaction in &hich a ma;or shareholders o&ns the o9ce to&er d Kin company is engaging in fraudulent activities 1=4 $ost auditors assess inherent ris* high for related parties and related party transactions because# a 5f the uniue classi"cation of the related party transaction reuired on the balance sheet( b the lac1 o indeendence bet&een the arties. c 5f the uniue classi"cation of related party transactions reuired on the income statement( d 0t is reuired by @6)S( 1=7 Which of the following would not necessarily be a related%party transaction? a 6ale to another cororation &ith a similar name b @urchase from another corporation that is controlled by the corporation.s chief stoc*holder c Ioan from the corporation to a major stoc*holder d Sale of land to the corporation by the spouse of a director 1=: Which of the following most li*ely to indicate the e/istence of related parties? a Writing down obsolete inventory just before year end b 6ailing to correct previously identi"ed internal control de"ciencies c Bepending on a single product for the success of the entity d Borro&ing money at an interest rate signifcantly belo& the mar1et rate 11= )elated party transactions may be indicated when another company# a 6ubsidi0es certain oerating e#enses o the comany b @urchases its securities at their fair value c Ioans to company at mar*et rates d Las had a distributor relationship with the company for 1= years 111 Which of the following auditing procedures is most li*ely to assist an auditor in identifying related party transaction? a )etesting ine!ective control previously reported to the audit committee b Sending second reuest for unanswered positive con"rmations of accounts receivable c (evie&ing inormation rovided by management identiying related arties and being alert or other material related arty transactions d 0nspecting communications with law "rms for evidence of unreported contingent liabilities 112 Which of the following auditing procedures most li*ely would assist an auditor in identifying related party transactions? a 0nspecting correspondence with lawyers for evidence of unreported contingent liabilities( b ouching accounting records or recurring transactions recorded ;ust ater the balance sheet date. c )eviewing con"rmations of loans receivable and payable for indications of guarantees( d @erforming analytical procedures for indications of possible "nancial diAculties( 11& fter determining that a related party transaction has in fact occurred- an auditor should a dd a separate paragraph to the auditor.s standard report to e/plain the transactions( b @erform analytical procedures to verify whether similar transaction occurred- but were not recorded( c 5btain an understanding of the business purpose of the transaction( d Substantiate that the transaction was consummated on terms euivalent to an arm.s%length transaction( 11+ When auditing related party transaction- an auditor palaces primary emphasis on a scertaining the rights and obligations of the related parties b Con"rming the e/istence of the related parties c Derifying the valuation of the related party transactions d valuating the disclosure o the related arty transactions
E/pert 11, person or "rm possessing special s*ill- *nowledge and e/perience in a particular "eld other than accounting and auditing is called aJan a @rofessional c. #ert b Consultant d( ssistant 11 Which of the following is not an e/pert upon whose wor* an auditor may rely? a ctuary c( ppraiser b )nternal auditor d( Engineer 114 Buring an audit- the auditor may need the assistance of an e/pert in obtaining suAcient appropriate evidence( common e/ample is a Evaluating the potential "nancial statement e!ect of an employee fraud b +etermination o the amounts using actuarial comutations c Evaluating the integrity of management d Betermining the suAciency and appropriateness of evidential matter obtained 117 Each of the following procedures reuires the assistance of an e/pert e/cept a Betermining the physical condition or uantity of underground mineral b Betermining the value of wor*s of art c 0nterpreting major contracts d +etermining the ade/uacy o disclosure in the notes to the fnancial statements 11: n e/pert whose e/pertise is used by the entity in preparing "nancial statements is called a>n# a $inancial e#ert b $anagement e/pert c uditor.s e/pert d Specialist 12= n e/pert whose e/pertise is used by the "rm in obtaining suAcient appropriate evidence is called a>n# a 6inancial e/pert b $anagement e/pert c Auditor’s e#ert d Specialist 121 When may the auditor refer to an e/pert.s wor* in the audit report? 5nly if the e/pert.s report only when the e/pert )esults in a modi"cation of the audit ssisted in the audit of material opinion account in the "nancial statements a
a
E/amination of "nancial and operating information including review of the means to identity- measureclassify and report such information and speci"c inuiry into individual items including detailed testing of transactions and recommending improvements thereto( b )eview of the economy- eAciency and e!ectiveness of operations including non%"nancial control system( c Establishment of adeuate accounting and internal control system( d )eview of compliance with laws- regulations and other e/ternal reuirements and with management policies and directives and other internal reuirements( 124 Which of the following statements about the internal auditor and the e/ternal auditor is not correct? a The role of internal auditing is determined by management and its objectives di!er from those of the e/ternal auditor who is appointed to report independently on the "nancial statements( b The e/ternal auditor has the sole responsibility for audit opinion e/pressed and that responsibility is not reduced by any use made of internal auditing( c 0nternal auditors should e/ercise the same degree of independence as reuired of the e/ternal auditor( d ll judgment relating to the audit of "nancial statements are those of the e/ternal auditor( 127 Which of the following statements in relation to the preliminary assessment of internal auditing is false? a The e/ternal auditor should obtain a suAcient understanding of internal audit activities to assist in planning the audit and developing an e!ective audit approach( b Buring the course of planning the audit- the e/ternal auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the e/ternal audit of the "nancial statements in speci"c audit areas( c E!ective internal auditing will often allow a modi"cation in the nature - timing- reduction in the e/tent and even eliminate in its entirety some procedures performed by e/ternal auditor( d 0n some cases- after having considered the activities of the internal auditing- the e/ternal auditor may decide that internal auditing will have no e!ect on e/ternal audit procedures( 12: When obtaining an understanding and performing preliminary assessment of the internal audit function- the important criteria includes organiFation status- scope of function- technical competence and due professional care( Which of the following statements relates to the criteria of due professional care? a The internal auditor should be free to communicate fully with the e/ternal auditor( b The management should act on internal audit recommendations( c There should be appropriate policies for hiring and training the internal auditing sta!( d There should be adeuate audit manuals- wor* programs and wor*ing papers( 1&= To operate e!ectively- an internal auditor must be independent of a The line function of organiFation( b The entity( c The employer%employee relationship which e/ists for other employees in the organiFation( d The audit committee of the board of directors( 1&1 When obtaining an understanding and performing a preliminary assessment of the internal audit functionthe auditor should consider the internal auditors. 5rganiFational Scope of Technical competence and due Status functions care a
d
@lace limited reliance on the wor* performed by the internal audit sta!(
