Auditing and Assurance Services, 16e (Arens/Elder/Beasley) Chapter 6 Audit Responsibilities and Objectives 6.1 Leaming Objective 6-1 1) The objective of an audit of the financial statements is an expression of an opinion on A) the fairness of the financial statements in all material respects. B) the accuracy of the financial statements. C) the accuracy of the annual report. ) the accuracy of the balance sheet and income statement Answer: A Terms: Objective of ordinary audit of financial statements Diff. Easy Objective: LO 6-1 AACSB: Reflective thinking 2) If the auditor believes that the financial statements are not fairly stated or is unable to reach a conclusion because of insufficient evidence, the auditor A) should withdraw from the engagement B) should request an increase in audit fees so that more resources can be used to conduct the audit. C) has the responsibility of notifying financial statement users through the auditor's report. D) should notify regulators of the circumstances Answer: C Terms: Auditor believes that financial statements are nor fairly presented Diff: Easy Objective: LO 6-1 AACSB: Reflective thinking 3) Auditors accumulate evidence to ‘A) defend themselves in the event of a lawsuit B) determine if the financial statements are correct. C) satisfy the requirements of the Securities Acts of 1933 and 1934. D) reach a conclusion about the faimess of the financial statements, Answer: D Terms: Auditors accumulate evidence Diff: Easy Objective: LO 6-1 AACSB: Reflective thinking 1 Copyright © 2017 Pearson Edueation, Inc.4) Which of the following is not one of the steps used to develop audit objectives? A) know the proper type of audit opinion to issue B) divide the financial statements into cycles C) know the management assertions about the financial statements D) know the specific audit objectives for classes of transactions Answer: A Terms: Steps the AICPA and accounting profession taking to reduce practitioner's exposure to lawsuits Diff, Easy Objective: LO 6-1 AACSB: Reflective thinking 5) When developing the audit objectives, the first step is to divide the financial statements into cycles Answer: FALSE Terms: Steps to develop audit objectives Diff, Easy Objective: LO 6-1 AACSB: Reflective thinking 6.2 Learning Objective 6-2 1) The responsibility for adopting sound accounting policies and maintaining adequate intemal control rests with the A) board of directors. B) company management. C) financial statement auditor. D) company's internal audit department. Answer: B Terms: Responsibility for adopting sound accounting policies and maintaining adequate internal controls, Diff, Easy Objective: LO 6-2 AACSB: Reflective thinking 2 Copyright © 2017 Pearson Edueation, Inc.2) If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can withdraw from the engagement or A) Issue an adverse opinion Issue a qualified opinion Yes Yes B) Issue an adverse opinion Issue a qualified opinion No No ° Issue an adverse opinion Issue a qualified opinion Yes No D) Issue an adverse opinion Issue a qualified opinion No Yes Answer: A Terms: Auditor insists on financial statement disclosures that management finds unacceptable Diff. Easy Objective: LO 6-2 AACSB: Reflective thinking 3) In certifying their annual financial statements, the CEO and CFO of a public company certify that the financial statements comply with the requirements of A) GAAP. B) the Sarbanes-Oxley Act. C) the Securities Exchange Act of 1934 D)GAAS. Answer: C Terms: Certifying annual financial statements by CEO and CFO Diff, Easy Objective: LO 6-2 AACSB: Reflective thinking Topic: Public 3 Copyright © 2017 Pearson Edueation, Inc.4) Which of the following statements is true of a public company's financial statements? A) Sarbanes-Oxley requires only the CEO to certify the financial statements. B) Sarbanes-Oxley requires only the CFO to certify the financial statements. C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial statements, D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial statements. Answer: C Terms: Public company's financial statements Diff: Easy Objective: LO 6-2 AACSB: Reflective thinking Topic: SOX 5) The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to A) the auditor. B) management. C) both management and the auditor equally. D) management for the statements and the auditor for the notes. Answer: B Terms: Responsibility for preparation of the financial statements and the accompanying footnotes Diff: Moderate Objective: LO 6-2 AACSB: Reflective thinking 6) Because they operate the business on a daily basis, a company's management knows more about the company's transactions and related assets, liabilities, and equity than the auditors. Answer: TRUE Terms: Responsibility for fair presentation of financial statements Diff. Easy Objective: LO 6-2 AACSB: Reflective thinking 7) The annual reports of many public companies include a statement about management's responsibilities and relationship with the CPA firm, Answer: TRUE Terms: Management's responsibility and relationship with CPA firm Diff, Easy Objective: LO 6-2 AACSB: Reflective thinking 8) The auditors determine which disclosures must be presented in the financial statements. Answer: FALSE Terms: Responsibility for fair presentation o' Diff Easy Objective: LO 6-2 AACSB: Reflective thinking ancial statements 4 Copyright © 2017 Pearson Edueation, Inc.9) The Sarbanes-Oxley Act provides for criminal penalties. Answer: TRUE Terms: Sarbanes-Oxley Act Diff: Easy Objective: LO 6-2 AACSB: Reflective thinking Topic: SOX 6.3 Learning Objective 6-3 1) The auditor's best defense when material misstatements are not uncovered is to have conducted the audit A) in accordance with generally accepted auditing standards, B) as effectively as reasonably possible. C) in a timely manner. D) only after an adequate investigation of the management team, Answer: A Terms: Auditors’ best defense when material misstatements are not uncovered Diff, Easy Objective: LO 6-3 AACSB: Reflective thinking 2) Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? A) The auditor commonly examines a sample, rather than the entire population of transactions B) Accounting presentations contain complex estimates which involve uncertainty. C) Fraudulently prepared financial statements are often difficult to detect. D) Auditors believe that reasonable assurance is sufficient in the vast majority of cases. Answer: D Terms: Reasons auditors provide only reasonable assurance on financial statements Diff, Easy Objective: LO 6-3 AACSB: Reflective thinking 3) Which of the following statements is the most correct regarding errors and fraud? ‘A) Aneerror is unintentional, whereas fraud is intentional, B) Frauds occur more often than errors in financial statements, C) Errors are always fraud and frauds are always errors. D) Auditors have more responsibility for finding fraud than errors. Answer: A Terms: Errors and fraud Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking 5 Copyright © 2017 Pearson Edueation, Inc.4) When an auditor believes that an illegal act may have occurred, the auditor should fi A) obtain an understanding of the nature and circumstances of the act. B) consult with legal counsel or others knowledgeable about the illegal act. C) discuss the matter with the audit committee. D) withdraw from the engagement. Answer: A Terms: Auditor believes an illegal act may have occurred Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking 5) The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements that are not are detected. A) important to the financial statements B) statistically significant to the financial statements ) material to the financial statements D) identified by the client Answer: C Terms: Auditor has no responsibility to plan and perform audit to obtain reasonable assurance Diff, Easy Objective: LO 6-3 AACSB: Reflective thinking 6) Fraudulent financial reporting is most likely to be committed by whom? A) line employees of the company B) outside members of the company's board of directors C) company management D) the company's auditors Answer: C Terms: Fraudulent financial reporting Diff, Easy Objective: LO 6-3 AACSB: Reflective thinking 7) Which of the following would most likely be deemed a direct effect illegal act? A) violation of federal employment laws B) violation of federal environmental regulations ©) violation of federal income tax laws D) violation of civil rights laws Answer: C Terms: Direct-effect illegal act Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking 6 Copyright © 2017 Pearson Edueation, Inc.8) The concept of reasonable assurance indicates that the auditor is A) not a guarantor of the correctness of the financial statements B) not responsible for the fairness of the financial statements. C) responsible only for issuing an opinion on the financial statements, D) responsible for finding all misstatements, Answer: A Terms: Concept of reasonable assurance Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking 9) Which of the following is the auditor least likely to do when aware of an illegal act? A) discuss the matter with the client's legal counsel B) obtain evidence about the potential effect of the illegal act on the financial statements C) contact the local law enforcement officials regarding potential criminal wrongdoing D) consider the impact of the illegal act on the relationship with the company's management Answer: C Terms: Illegal acts Diff, Moderate Objective: LO 6-3 AACSB: Reflective thinking 10) An auditor discovers that the company's bookkeeper unintentionally made an mistake in calculating the amount of the quarterly sales. This is an example of A) employee fraud. B) an error. C) misappropriation of assets. D)adefalcation Answer: B Terms: Errors and fraud Diff, Moderate Objective: LO 6-3 AACSB: Reflective thinking 11) An auditor has a duty to A) provide reasonable assurance that material misstatements will be detected. B) be a guarantor of the fairness in the statements, C) be equally responsible with management for the preparation of the financial statements. D) be an insurer of the fairness in the statements. Answer: A Terms: Auditor responsibility for notifying users as to whether statements are properly stated Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 7 Copyright © 2017 Pearson Edueation, Inc.12) If the auditor were responsible for making certain that all of management's assertions in the financial statements were absolutely correct, A) bankruptcies could no longer occur. B) bankruptcies would be reduced to a very small number. C) audits would be much easier to complete. D) audits would not be economically practical, Answer: D Terms: Auditor responsible for making certain that all of management's assertions were absolutely correct Diff, Moderate Objective: LO 6-3 AACSB: Reflective thinking 13) When dealing with laws and regulations that do not have a direct effect on the financial statements, the auditor A) should inquire of management about whether the entity is in compliance with such laws and regulations. B) has no responsibility to determine if any violations of these laws has occurred. C) must report all violations, including inconsequential violations, to the audit committee. D) should perform the same procedures as for violations having a direct effect on the financial statements. Answer: A Terms: Indirect-effect illegal acts Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 14) Which of the following statements is usually true? A) Materiality is easy to quantify. B) Fraudulent financial statements are often easy for the auditor to detect, especially when there is collusion among management. C) Reasonable assurance is a low level of assurance that the financial statements are free from material misstatement. D) An item is considered material if it would likely have changed or influenced the decisions of a reasonable person using the statements. Answer: D Terms: Materiality Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 8 Copyright © 2017 Pearson Edueation, Inc.15) Auditing standards make distinction(s) between the auditor's responsibilities for searching for errors and fraud. A)little B)a significant C)no D) various Answer: C Terms: Auc Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 16) In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is A) greater for management fraud because managers are inherently more deceptive than employees. B) greater for management fraud because of management's ability to override existing intemal controls. C) greater for employee fraud because of the higher crime rate among blue collar workers. D) greater for employee fraud because of the larger number of employees in the organization, Answer: B Terms: Management fraud vs. employee fraud and auditor failure to detect both Diff, Challenging Objective: LO 6-3 AACSB: Reflective thinking 17) Misappropriation of assets A) is generally committed by company management. B) harms the users of the financial statements by providing them incorrect financial data for their decision making. C) causes harm to stockholders because the assets are no longer available to their rightful owners, D) causes the financial statements to be misstated since the misappropriation usually involves material amounts. Answer: C Terms: Misappropriation of assets Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 9 Copyright © 2017 Pearson Edueation, Inc.18) When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility A) more on discovering errors than employee fraud. B) more on discovering employee fraud than errors. C) equally on discovering errors and employee fraud. D) on the senior auditor for detecting errors and on the manager for detecting employee fraud. Answer: C Terms: Fraud and errors Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 19) If there is collusion among management, the chance a normal audit would uncover such acts is A) very low B) very high. C) zero. D) none of the above. Answer: A Terms: Employees collude to falsify documents Diff Moderate Objective: LO 6-3 AACSB: Reflective thinking 20) When the auditor becomes aware of or suspects noncompliance with laws and regulations A) the auditor should evaluate the effects of the noncompliance on other aspects of the audit. B) the auditor should discuss the matter with management at a level above those suspected of the noncompliance. C) the auditor should obtain additional information to evaluate the possible effects on the financial statements D)all of the above Answer: D Terms: Audit procedures when noncompliance is identified or suspected Diff, Moderate Objective: LO 6-3 AACSB: Reflective thinking 10 Copyright © 2017 Pearson Edueation, Inc.21) When the auditor identifies or suspects noncompliance with laws and regulations, the auditor ‘A) should discuss the matter with those whom they believe committed the illegal act. B) begin communication with the FASB in accordance with PCAOB regulations C) may disclaim an opinion on the basis of scope limitations if he is precluded by management from obtaining sufficient appropriate evidence. D) should withdraw from the engagement. Answer: C Terms: Noncompliance with laws and regulations Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 22) When an auditor knows that an illegal act has occurred, she must A) report it to the proper governmental authorities. B) consider the effects on the financial statements, including the adequacy of disclosure C) withdraw from the engagement. ) issue an adverse opinion. Answer: B Terms: Auditor knows illegal act occurred Diff Moderate Objective: LO 6-3 AACSB: Reflective thinking Topic: Public 23) Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations? A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements, B) The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements. C) Iti the responsibility of the auditor to determine if an act constitutes noncompliance. D) The auditor must inform an outside party if management has knowingly not complied with a Jaw or regulation. Answer: B Terms: Illegal acts, effect on financial statements Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking "1 Copyright © 2017 Pearson Edueation, Inc.24) Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements? A) Generally, the auditor is under no obligation to notify parties other than personnel within the client's organizatic B) Generally, the auditor is under an obligation to inform the PCAOB. C) Generally, the auditor is obligated to disclose the relevant facts in the auditor's report D) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act. Answer: A Terms: Auditor responsibility with respect to illegal acts Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 25) 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 is required to provide reasonable assurance that the financial statements are free of both material errors and fraud. C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets. D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued Answer: B Terms: Auditor responsibility regarding detection of fraud Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 26) When reporting identified or suspected noncompliance, A) the auditor must report inconsequential noncompliance to the audit committee. B) the auditor should communicate all material noncompliance matters to those charged with governance. C) any intentional noncompliance must be reported to local law enforcement, D)all noncompliance, whether material or not, must result in a disclaimer of opinion. Answer: B Terms: Reporting of identified or suspected noncompliance Diff Moderate Objective: LO 6-3 AACSB: Reflective thinking 2 Copyright © 2017 Pearson Edueation, Inc.27) Another term for misappropriation of assets is, ‘A) management fraud. B) collusion. C) employee fraud D) illegal acts. Answer: C Terms: Misappropriation of assets Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking 28) The provisions of many laws and regulations affect the A) directly, B) only indirectly. C) both directly and indirectly. D) materially if direct; immaterially if indirect. Answer: B Terms: Illegal acts, effect on financial statements Diff, Challenging Objective: LO 6-3 AACSB: Reflective thinking 29) Ifa client has violated federal tax laws, AA) the auditor must notify the IRS. B) and the amount is significant, the auditor should communicate with those charged with governance. C) the noncompliance generally will not impact the financial statements. D) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit. Answer: B Terms: Illegal acts, effect on financial statements Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 30) Discuss the differences between errors, frauds, and illegal acts. Give an example of each. Answer: The primary difference between errors and frauds is that errors are unintentional misstatements of the financial statements, whereas frauds are intentional misstatements. Illegal acts are violations of laws or government regulations, other than frauds. An example of an error is a mathematical mistake when footing the columns in the sales journal. An example of a fraud is the creation of fictitious accounts receivable. An example of an illegal act is the dumping of toxic waste in violation of the federal environmental protection laws. Terms: Errors, frauds, and illegal acts Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking B Copyright © 2017 Pearson Edueation, Inc.31) Discuss the actions an auditor should take when an illegal act is identified or suspected. Answer: When an auditor discovers or suspects noncompliance with a law or regulation (illegal act), unless the matters involved are inconsequential, the auditor should: 1. Obtain an understanding of the nature and circumstances of the act. Additional information should be obtained to evaluate the possible effects on the financial statements. The auditor should discuss the matter with management at a level above those involved with the suspected noncompliance, and, when appropriate, those charged with governance. If the auditor is precluded by management or those charged with governance from obtaining sufficient appropriate evidence to provide sufficient information that supports that the entity is in compliance with the laws and regulations, and the auditor believes the effect of the noncompliance may be material to the financial statements, the auditor should consider the need to obtain legal advice. The auditor should also evaluate the effects of the noneompliance on other aspects of the audit 2. Communicate with those charged with governance matters involving noncompliance with Jaws and regulations that came to the auditor's attention during the course of the audit. If the matter is believed to be intentional and material, it should be communicated to those charged with governance, such as the board of directors, as soon as practicable 3. Identify whether a responsibility exists to report the identified or suspected noncompliance to parties outside the entity, such as regulatory authoriti 4, If the noncompliance has a material effect and has not been adequately reflected in the financial statements, the auditor should express a qualified or adverse opinion. If the auditor has been precluded by management from obtaining sufficient appropriate evidence to determine if the noncompliance is material, the auditor should express a qualified opinion or disclaim an opinion. Terms: Actions auditor should take when auditor discovers illegal act Diff, Moderate Objective: LO 6-3 AACSB: Reflective thinking 32) Discuss three reasons why auditors are responsible for "reasonable" but not “absolute” assurance, Answer: + Most audit evidence results from testing a sample of a population, Sampling involves some risk of not uncovering material misstatements, + Accounting presentations contain complex estimates, which inherently involve uncertainty and can be affected by future events. As a result, the auditor has to rely on evidence that is persuasive but not convincing. + Fraudulently prepared financial statements are often very difficult for the auditor to detect, especially when there is collusion among management. Terms: Reasons auditors are responsible for reasonable but not absolute assurance Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 4 Copyright © 2017 Pearson Edueation, Inc.33) Discuss the differences in the auditor's responsibilities for discovering (1) material errors, (2) material fraud (3) illegal acts having a direct effect on the financial statements, and (4) illegal acts that do not have a direct effect on the financial statements. Answer: Auditing standards make no distinction between the auditor's responsibilities for searching for errors and fraud. In either case, the auditor must obtain reasonable assurance about whether the statements are free of material misstatements. The standards also recognize that fraud is often more difficult to detect because management or the employees perpetrating the fraud attempt to conceal the fraud. Still, the difficulty of detection does not change the auditor's responsibility to properly plan and perform the audit to detect material misstatements, whether caused by error or fraud. The auditor's responsibility for uncovering illegal acts that have a direct effect on the financial statements is the same as for errors and fraud. However, the auditor is not required to search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they exist. Terms: Auditor responsibilities for discovering material errors, material fraud, direct-effect illegal acts, and indirect-effect illegal acts Diff: Challenging Objective: LO 6-3 AACSB: Reflective thinking 34) Errors are usually more difficult for an auditor to detect than frauds, ‘Answer: FALSE Terms: Auditor detection of errors and frauds Diff: Easy Objective: LO 6-3 AACSB: Reflective thinking 35) Other than inquiring of management about policies they have established to prevent illegal acts and whether management knows of any laws or regulations that the company has violated, the auditor should not search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they may exist. Answer: TRUE ‘Terms: Auditor responsibility for searching for illegal acts that do not have a direet effect on the financial statements Diff. Easy Objective: LO 6-3 AACSB: Reflective thinking Is Copyright © 2017 Pearson Edueation, Inc.36) When an auditor believes that an illegal act may have occurred, the first step he or she should take is to gather additional evidence to determine the extent of the illegality and if there is a direct impact on the financial statements Answer: TRUE Terms: Auditor believes an illegal act may have occurred Diff Easy Objective: LO 6-3 AACSB: Reflective thinking 37) Audits are expected to provide a higher degree of assurance for the detection of material frauds than is provided for an equally material error. Answer: FALSE Terms: Degree of assurance for detection of material frauds and errors Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 38) Auditors have a higher degree of responsibility for detecting illegal acts that have a direct effect on the financial statements than illegal acts that do not have a direct effect on the financial statements. Answer: TRUE Terms: Auditor degree of responsibility for detecting illegal acts, Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 39) The auditor's first course of action when an illegal act is uncovered should be to immediately notify the appropriate authorities, including but not limited to, law enforcement and the Securities and Exchange Commission, Answer: FALSE Terms: Illegal act uncovered Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 40) An audit generally provides no assurance that illegal acts that do not have a direet effect on the financial statements will be detected Answer: TRUE Terms: Indirect-effect illegal acts; No assurance Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 16 Copyright © 2017 Pearson Edueation, Inc.41) Auditing standards indicate that reasonable assurance is a moderate, but not absolute, level of assurance that the financial statements are free of material misstatement. Answer: FALSE Terms: Moderate or high risk of management fraud Diff, Moderate Objective: LO 6-3 AACSB: Reflective thinking 42) In obtaining reasonable assurance that the financial statements are free of material misstatement, the auditor does not need to take into account the applicable legal and regulatory framework relevant to the client Answer: FALSE Terms: Auditor's responsibility for year-end inventory procedures Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking 43) The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company's financial position and results of operations. Answer: FALSE Terms: Objective of audit of financial statements Diff, Challenging Objective: LO 6-3 AACSB: Reflective thinking 44) As the impact from noncompliance is further removed from affecting the financial statements, the less likely the auditor is to become aware of or recognize noncompliance when auditing the financial statements. Answer: TRUE Terms: Auditor responsibility for searching for illegal acts that do not have a direct effect on the financial statements Diff: Moderate Objective: LO 6-3 AACSB: Reflective thinking ” Copyright © 2017 Pearson Education, Inc.6.4 Leaming Objective 6-4 1) An audit must be performed with an attitude of professional skepticism. Professional skepticism consists of two primary components: a questioning mind and ‘A) the assumption that upper-level management is dishonest. B) a critical assessment of the audit evidence. C) the assumption that all employees are motivated by greed. D) verification of all critical information by independent third parties. Answer: B Terms: Attitude of professional skepticism Diff: Easy Objective: LO 6-4 AACSB: Reflective thinking 2) Which of the following is an accurate statement about professional skepticism? A) Professional skepticism involves a critical assessment of the evidence. B) Professional skepticism is easy to implement in practice. C) It is easy for auditors to understand that their clients may try to deceive them throughout the audit process D) Professional skepticism is only necessary for the audits of public companies. Answer: A Terms: Professional skepticism Diff: Easy Objective: LO 6-4 AACSB: Reflective thinking 3) One of the characteristics of professional skepticism is , Which is the conviction to decide for oneself, rather than accepting the claims of others. A) interpersonal understanding B) autonomy C) suspension of judgment D) self-esteem Answer: B Terms: Characteristics of professional skepticism Diff: Moderate Objective: LO 6-4 AACSB: Reflective thinking 18 Copyright © 2017 Pearson Education, Inc.4) A questioning mindset ‘A) means the auditor must prove every statement that management makes to them. B) means the auditor should approach the audit with a "do not trust anyone" mental outlook, C) assures that the auditor will only accept honest clients. D) means the auditor should approach the audit with a "trust but verify" mental outlook, Answer: D Terms: Professional skepticism Diff: Moderate Objective: LO 6-4 AACSB: Reflective thinking 5) One of the characteristies of professional skepticism is. , Which is a desire to investigate beyond the obvious A) self-esteem B) an interpersonal understanding C)asseareh for knowledge D)a questioning mindset Answer: C Terms: Professional skepticism Diff: Moderate Objective: LO 6-4 AACSB: Reflective thinking 6) is the self-confidence to resist persuasion and to challenge assumptions or conclusions. A) Self-esteem B) Interpersonal understanding C) Suspension of judgment D) Autonomy Answer: A Terms: Professional skepticism Diff: Moderate Objective: LO 6-4 AACSB: Reflective thinking 7) An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors of fraud and therefore should A) plan and perform the engagement with an attitude of professional skepticism. B) not rely on internal controls that are designed to prevent or detect errors or fraud C) design audit tests to detect unrecorded transactions. D) extend the work to audit the majority of the recorded transactions and records of an entity. Answer: A Terms: Professional skepticism when auditing a client Diff: Moderate Objective: LO 6-4 AACSB: Reflective thinking 19 Copyright © 2017 Pearson Edueation, Inc.8) Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism. List and briefly describe each of these characteristics. Answer: The six characteristies of skepticism are: 1. Questioning mindset — a disposition to inquiry with some sense of doubt 2. Suspension of judgment — withholding judgment until appropriate evidence is obtained 3. Search for knowledge — a desire to investigate beyond the obvious, with a desire to corroborate 4, Interpersonal understanding — recognition that people's motivations and perceptions can lead them to provide biased or misleading information 5. Autonomy — the self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others 6. Self-esteem — the self-confidence to resist persuasion and to challenge assumptions or conclusions. Terms: Professional skepticism Diff: Moderate Objective: LO 6-4 AACSB: Reflective thinking 9) Auditors often convince themselves that they only accept clients they can trust and who have high integrity. Answer: TRUE Terms: Professional skepticism Diff: Easy Objective: LO 6-4 AACSB: Reflective thinking 10) A suspension of judgment is the recognition that people's motivations and perceptions can lead them to provide biased or misleading information, Answer: FALSE Terms: Professional skepticism; interpersonal understanding; suspension of judgment Diff. Easy Objective: LO 6-4 AACSB: Reflective thinking 6.5 Learning Objective 6-5 1) The starting point to effective professional judgment begins with A) gathering the facts B) identifying alternatives. ) identifying relevant literature D) identifying and defining the issue. Answer: D Terms: Professional judgment process Diff: Easy Objective: LO 6-5 AACSB: Reflective thinking 20 Copyright © 2017 Pearson Edueation, Inc.2) Which of the following is not a step in the professional judgment process? ‘A) make the decision B) perform the analysis C) determine the type of audit opinion D) review and document the rationale for the conclusion Answer: C Terms: Professional judgment process Diff: Moderate Objective: LO 6-5 AACSB: Reflective thinking 3) is the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value. A) Anchoring B) Availability C) Overconfidence D) Confirmation Answer: A Terms: Common judgment tendencies Diff: Moderate Objective: LO 6-5 AACSB: Reflective thinking 4) When the auditor considers whether he understands the form and substance of the transaction or event, and whether the relevant authoritative literature has been applied consistently by the client, he is performing which step in the professional judgment process? A) identifying and defining the issue B) performing the analysis and identifying potential alternatives C) making the decision D) gathering the facts Answer: B Terms: Professional judgment process Diff Moderate Objective: LO 6-5 AACSB: Reflective thinking 5) When performing the review and completing the documentation and rationale for the conclusion step of the professional judgment process, auditors will A) consider the accounting and auditing standards relevant to the issues. B) articulate in written form the rationale of their judgment C) identify the issue D) gather the facts Answer: B Terms: Professional judgment process Diff: Easy Objective: LO 6-5 AACSB: Reflective thinking a Copyright © 2017 Pearson Edueation, Inc.6) Auditors should be alert for potential judgment tendencies, traps, and biases that may impact their decision making process. Identify and define four of these judgment tendencies. Then, for each judgment tendency, suggest a way to avoid or mitigate the tendency. Answer: The judgment tendencies and strategies to avoid or mitigate the tendencies are: 1. Confirmation: the tendency to put more weight on information that is consistent with initial beliefs or preferences 2. Overconfidence: the tendency to overestimate one’s own abilities to perform tasks or to make accurate assessments of risks or other judgments and decisions 3. Anchoring: the tendency to make assessments by starting from an initial value and then adjusting insufficiently away from the initial value 4, Availability: the tendeney to consider information that is easily retrievable or what's easily accessible as being more likely or more relevant. Strategy to avoid or mitigate the tendency: 1. Confirmation: Make the opposing case and consider alternative explanations. Consider potentially disconfirming or conflicting information 2. Overconfidence: Challenge opinions and experts. Challenge underlying assumptions. 3. Anchoring: Solicit input from others. Consider management bias, including the potential for fraud or material misstatement. 4. Availability: Consider why something comes to mind. Obtain and consider objective data. Consult with others and take the opposing case Terms: Professional judgment; strategies to mitigate common judgment tendencies Diff. Challenging Objective: LO 6-5 AACSB: Reflective thinking 7) The profession has developed professional judgment frameworks that illustrate an effective decision-making process. Answer: TRUE Terms: Professional judgment process Diff, Easy Objective: LO 6-5 AACSB: Reflective thinking 8) During the professional judgment process, the analysis may identify only one appropriate response to the issue. Answer: FALSE Terms: Professional judgment process Diff: Moderate Objective: LO 6-5 AACSB: Reflective thinking 2 Copyright © 2017 Pearson Edueation, Inc.9) Overconfidence is the tendency to put more weight on information that is consistent with the initial beliefs or preferences. Answer: FALSE Terms: Professional judgment process Diff, Moderate Objective: LO 6-5 AACSB: Reflective thinking 10) In order to mitigate availability, the auditor should consult with others and make the opposing case. Answer: TRUE Terms: Professional judgment; strategies to mitigate common judgment tendencies Diff Moderate Objective: LO 6-5 AACSB: Reflective thinking 6.6 Learning Objective 6-6 1) Why does the auditor divide the financial statements into smaller segments? A) Using the cycle approach makes the audit more manageable. B) Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces. C) The eycle approach is used because auditing standards require it D) All of the above are correct. Answer: A Terms: Reason auditor divides financial statements into smaller segments Diff: Moderate Objective: LO 6-6 AACSB: Reflective thinking 2) Why does the auditor divide the financial statements into segments around the financial statement cycles? ‘A) Most auditors are trained to audit cycles as opposed to entire financial statements. B) The approach aids in the assignment of tasks to different members of the audit team C) The eycle approach is required by auditing standards D) The cycle approach allows the auditor to detect illegal acts. Answer: B Terms: Reason auditor divides financial statements into smaller segments Diff Moderate Objective: LO 6-6 AACSB: Reflective thinking 2B Copyright © 2017 Pearson Edueation, Inc.3) The most important general ledger account included in and affecting several cycles is the ‘A) cash account. B) inventory account. C) income tax expense and liability accounts. D) retained earnings account. Answer: A Terms: Account included in and affected several cycles. Diff: Moderate Objective: LO 6-6 AACSB: Reflective thinking 4) When using the eycle approach to segmenting the audit, the reason for treating capital acquisition and repayment separately from the acquisition of goods and services is that A) the transactions are related to financing a company rather than to its operations B) most capital acquisition and repayment cycle accounts involve few transactions, but each is often highly material and therefore should be audited extensively C) Both A and B are correct, D) Neither A nor B is correct. Answer: C Terms: Cycle approach to segmenting an audit Diff, Challenging Objective: LO 6-6 AACSB: Reflective thinking 5) In describing the cycle approach to segmenting an audit, which of the following statements is, not true? A) All general ledger accounts and journals are included at least once. B) Some journals and general ledger accounts are included in more than one cycle. C) The "capital acquisition and repayment” cycle is closely related to the "acquisition of goods and services and payment" cycle D) The "inventory and warehousing" eycle may be audited at any time during the engagement since it is unrelated to the other cycles. Answer: D Terms: Cycle approach to segmenting an audit Diff: Challenging Objective: LO 6-6 AACSB: Reflective thinking 4 Copyright © 2017 Pearson Edueation, Inc.6) The cycle approach to auditing ‘A) ties to the way transactions are recorded in journals and then summarized in the general ledger and financial statements. B) cannot combine transactions recorded in different journals with the general ledger balances that result from those transactions. C)is the only way of segmenting an audit. D) assumes that each account has two or more cycles associated with it. Answer: A Terms: Cycle approach to segmenting an audit Diff, Moderate Objective: LO 6-6 AACSB: Reflective thinking 7) Which balance sheet accounts are included in the payroll and personnel cycle? A) cash in bank, acerued payroll, trade accounts receivable B) accrued payroll, notes payable, and deferred tax ) accrued payroll, cash in bank, and accrued payroll taxes D) salaries and commissions, cash in bank, accrued payroll taxes Answer: C Terms: Cycle approach to segmenting an audit Diff Moderate Objective: LO 6-6 AACSB: Reflective thinking 8) Auditors generally use a financial statement cycle approach when performing a financial statement audit. Describe the transaction flow, using specific examples, from journals to financial statements that produce financial statements. Answer: Transactions-sales, cash receipts, acquisition of goods/services, cash disbursements, payroll services and disbursements, and allocation and adjustments Journals-sales, cash receipts, acquisitions, cash disbursements, payroll, and general General ledger and subsidiary ledgers to General ledger trial balance to financial statements, Terms: Financial statement cycle approach when performing a financial statement audit Diff, Moderate Objective: LO 6-6 AACSB: Reflective thinking 25 Copyright © 2017 Pearson Edueation, Inc.9) Listed below are several accounts listed from a company's trial balance, Next to each account put the letter corresponding to the transaction cycle used to audit the account S = Sales and collection cycle I= Inventory and warehousing cycle A= Acquisition and payment cycle C= Capital acquisition and repayment cycle Payroll and personnel cycle 1 Sales returns and allowances 5. Salaries and commissions 2. Capital stock 6 Cost of goods sold 3 Buildings 7. Trade accounts receivable 4 Notes payable 8 Rent Answer. 1.8, 2.C,3.A,4.C,5.P,6.1,7.8,8.A Terms: Financial statement cycle approach when performing a financial statement audit Diff, Moderate Objective: LO 6-6 AACSB: Reflective thinking 10) Under the cycle approach to segmenting an audit, transactions recorded in different journals, should never be combined with the general ledger balances that result from those transactions. ‘Answer: FALSE Terms: Cycle approach to segmenting an audit Diff: Moderate Objective: LO 6-6 AACSB: Reflective thinking 11) Under the cycle approach, the only accounts that have two or more eyeles associated with them are cash and accounts receivable. Answer: FALSE Terms: Cycle approach to segmenting an audit Diff, Moderate Objective: LO 6-6 AACSB: Reflective thinking 12) Although auditors need to consider the interrelationships between cycles, they typically treat eycles independently to the extent practical to manage complex audits effectively, Answer: TRUE Terms: Cycle approach to segmenting an audit Diff: Moderate Objective: LO 6-6 AACSB: Reflective thinking 13) When examining the relationships of the five cycles and general cash, the cycles have no beginning or end except at the origin or final disposition of the company. Answer: TRUE Terms: Cycle approach to segmenting an audit Diff, Moderate Objective: LO 6-6 AACSB: Reflective thinking 26 Copyright © 2017 Pearson Edueation, Inc.6.7 Leaming Objective 6-7 1) Auditors have found that generally the most efficient and effective way to conduct audits is to ‘A) obtain complete assurance about the correctness of each class of transactions affecting the account. B) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts. C) obtain assurance about the ending balance of the account only, D) verify each entry that was made into an account Answer: B Terms: Setting audit objectives Diff: Moderate Objective: LO 6-7 AACSB: Reflective thinking 2) The term audit objective refers to all of the following exeept for A) transaction-related audit objectives. B) presentation and disclosure-related audit objectives. C) balance-related audit objectives. D) cycle-related audit objectives. Answer: D Terms: Setting audit objectives Diff, Easy Objective: LO 6-7 AACSB: Reflective thinking 3) When an auditor is determining what information to include in the notes to the financial statements relating to bonds payable, he is concerned with the transaction-related audit objectives. Answer: FALSE Terms: Setting audit objectives Diff: Moderate Objective: LO 6-7 AACSB: Reflective thinking 4) Itis generally impractical for the auditor to obtain complete assurance about the correctness of each class of transactions. Answer: TRUE Terms: Setting audit objectives Diff: Easy Objective: LO 6-7 AACSB: Reflective thinking 2 Copyright © 2017 Pearson Edueation, Inc.6.8 Leaming Objective 6-8 1) Which of the following is not one of the AICPA categories of assertions? A) assertions about classes of transactions and events for the period under audit B) assertions about financial statements and correspondence to GAAP. C) assertions about account balances at period end D) assertions about presentation and disclosure Answer: B Terms: Categories of assertions Diff. Easy Objective: LO 6-8 AACSB: Reflective thinking 2) Ifa short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the ‘A) completeness assertion. B) existence assertion. C) cutoff assertion, D) classification assertion Answer: D Terms: Violation of assertions Diff: Easy Objective: LO 6-8 AACSB: Reflective thinking 3) International auditing standards and U.S. GAAP classify assertions into three categories. Which of the following is not a category of assertions that management makes about the accounting information in financial statements? A) assertions about classes of transactions for the period under audit B) assertions about account balances at period end C) assertions about the quality of source documents used to prepare the financial statements D) assertions about presentation and disclosure Answer: C Terms: Management assertions Diff: Easy Objective: LO 6-8 AACSB: Reflective thinking 28 Copyright © 2017 Pearson Edueation, Inc.4) Management assertions are A) directly related to the financial reporting framework used by the company, usually U.S. GAAP or IERS. B) stated in the footnotes to the financial statements. C) explicitly expressed representations about the financial statements, ) provided to the auditor in the assertions letter, but are not disclosed on the financial statements. Answer: A Terms: Management assertions Diff, Moderate Objective: LO 6-8 AACSB: Reflective thinking 5) Management makes the following assertions about account balances: A) existence, completeness, classification and cutoff. B) existence, accuracy, classification and rights and obligations. C)existence, completeness, valuation and allocation, and rights and obligations. D) existence, completeness, rights and obligations, and cutoff. Answer: C Terms: Management assertions Diff, Challenging Objective: LO 6-8 AACSB: Reflective thinking 6) Management's disclosure of the amount of unfunded pension obligations and the assumptions underlying these amounts is an example of the assertion. A) completeness B) existence ©) accuracy and valuation D) rights and obligations Answer: C Terms: Accuracy and valuation assertion Diff Moderate Objective: LO 6-8 AACSB: Reflective thinking 7) Which of the following assertions is described as "this assertion addresses whether all transactions that should be included in the financial statements are in fact included"? A) occurrence B) completeness C) rights and obligations D) existence Answer: B Terms: Assertion which addresses whether all transactions that should be included are included Diff, Moderate Objective: LO 6-8 AACSB: Reflective thinking 29 Copyright © 2017 Pearson Education, Inc.8) Which of the following management assertions is not associated with classes of transactions. and events? A) occurrence B) classification C) accuracy D) rights and obligations Answer: D Terms: Management assertion not associated with transaction-related audit objectives Diff, Moderate Objective: LO 6-8 AACSB: Reflective thinking 9) With increases in the complexity of transactions and the need for expanded disclosures about these transactions, assertions about the have increased in importance. A) existence B) account balances C) presentation and disclosure D) classes of transactions Answer: C Terms: Management assertions Diff: Easy Objective: LO 6-8 AACSB: Reflective thinking 10) Briefly explain each management assertion related to classes of transactions and events for the period under audit Answer: + Occurrence. Transactions and events that have been recorded have occurred and pertain to the entity. + Completeness. All transactions and events that should have been recorded have been recorded, + Accuracy. Amounts and other data relating to recorded transactions and events have been recorded appropriately. + Classification. Transactions and events have been recorded in the proper accounts + Cutoff. Transactions and events have been recorded in the correct accounting period. ‘Terms: Management assertions related to classes of transactions Diff: Moderate Objective: LO 6-8 AACSB: Reflective thinking 30 Copyright © 2017 Pearson Edueation, Inc.11) Briefly explain each management assertion related to account balances at period end. Answer: + Existence. Assets, liabilities, and equity interests exist + Completeness. All assets, liabilities, and equity interests that should have been recorded have been recorded. + Valuation and allocation, Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded, + Rights and obligations. The entity holds or controls the rights to assets, and liabilities are the obligation of the entity. Terms: Management asse1 Diff: Moderate Objective: LO 6-8 AACSB: Reflective thinking s related to account balances at period end 12) Briefly explain each management assertion related to presentation and disclosure. Answer: + Occurrence and rights and obligations. Disclosed events and transactions have occurred and pertain to the entity. + Completeness. All disclosures that should have been included in the financial statements have been included. + Accuracy and valuation. Financial and other information are disclosed appropriately and at appropriate amounts. + Classification and understandability. Financial and other information is appropriately presented and described and disclosures are clearly expressed, Terms: Management assertions related to presentation and disclosure Diff Moderate Objective: LO 6-8 AACSB: Reflective thinking 13) Relevant assertions have a meaningful bearing on whether the account is fairly stated and are used to assess the risk of material misstatement and the design and performance of audit procedures. Answer: TRUE ‘Terms: Management assertions Diff: Moderate Objective: LO 6-8 AACSB: Reflective thinking 14) The auditor's audit objectives follow and are closely related to management assertions. Answer: TRUE Terms: Management assertions Diff: Moderate Objective: LO 6-8 AACSB: Reflective thinking 31 Copyright © 2017 Pearson Edueation, Inc.6.9. Leaming Objective 6-9 1) Which of the following statements is true regarding the distinetion between general audit objectives and specific audit objectives for each class of transactions? A) The specific audit objectives are applicable to every class of transactions, B) The general audit objectives are applicable to every class of transactions. C) Once the specific transaction-related audit objectives are established, they can be used to develop the general transaction-related objectives. D) For any given class of transactions, usually only one audit objective must be met to conclude the transactions are properly recorded. Answer: B Terms: Difference between general and specific audit objectives Diff: Moderate Objective: LO 6-9 AACSB: Reflective thinking 2) The auditor is determining that the correct selling price was used for billing and that the quantity of goods shipped was the same as the quantity billed. She is gathering evidence about which transaction-related audit objective? A) existence B) completeness C) accuracy D) cut-off Answer: C Terms: Evidence for transaction-related audit objective if recorded sales are for amount shipped and correctly billed and recorded Diff Moderate Objective: LO 6-9 AACSB: Analytic inking 3) The posting and summarization audit objective is the auditor's counterpart to management's assertion of A) occurrence B) completeness, C) accuracy. D) classification, Answer: C Terms: Transaction-related audit objectives Diff: Moderate Objective: LO 6-9 AACSB: Reflective thinking 2 Copyright © 2017 Pearson Edueation, Inc.4) deals with poten (unrecorded transactions) A) Occurrence; completeness B) Completeness; occurrence C) Accuracy; classification D) Classification; accuracy Answer: A Terms: General and specific audit objectives Diff: Challenging Objective: LO 6-9 AACSB: Reflective thinking overstatement and deals with understatements 5) In the context of the audit of sales, distinguish between the occurrence and completeness transaction-related audit objectives. State the effect on the sales account (overstatement or understatement) of a violation of each objective. Answer: When testing the occurrence objective for sales, the auditor's focus is on whether the sales that have been recorded in the sales journal actually occurred. In contrast, tests of the completeness objective are concemed with determining whether all sales that actually occurred have been recorded in the sales journal, Violations of the occurrence objective result in overstatements of sales; violations of the completeness objective result in understatements of sales. Terms: General and specific audit objectives Diff, Challenging Objective: LO 6-9 AACSB: Reflective thinking 3 Copyright © 2017 Pearson Edueation, Inc.6) Below are five audit procedures, all of which are tests of transactions associated with the audit of the sales and collection cycle, Also below are the six general transaction-related audit objectives and the five management assertions. For each audit procedure, indicate (1) its audit objec and (2) the management assertion being tested. (Audit Objectives IA. occurrence IB. completeness >. accuracy 1D. posting and summarization I. classification |Assertion IV. occurrence IW. completeness accuracy ly. classification iz. cutoft IF. timing 1. Vouch recorded sales from the sales journal to the file of bills of lading. aw 2) 2. Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in recording sales transactions, ay QQ 3. Account for the sequence of prenumbered bills of lading and sales invoices a) Qe 4, Trace from a sample of prelistings of cash receipts to the cash receipts journal, testing for names, amounts, and dates a Q)_ 5. Examine customer order forms for credit approval by the credit manager. a Q Answer: L(AQ)V 2 IF Q)Z 3.()BQ)W 4.(1) B,C) W, X SD AQ)V Terms: Management assertions and transaction-related audit objectives Diff Challenging Objective: LO 6-9 AACSB: Analytic thinking 34 Copyright © 2017 Pearson Education, Inc.7) Below are five audit procedures, all of which are tests of transactions associated with the audit of the acquisition and payment cycle. Also below are the six general transaction-related audit objectives and the five management assertions. For each audit procedure, indicate (1) its audit objec and (2) the management assertion being tested. (Audit Objectives IA. occurrence IB. completeness >. accuracy 1D. posting and summarization I. classification |Assertion IV. occurrence IW. completeness accuracy ly. classification iz. cutoft IF. timing 1. Foot the purchases journal and trace the totals to the related general ledger accounts. aw Q)_ 2. Recompute the cash discounts taken by the client. aw @) 3. Compare dates on cancelled checks with the bank cancellation date. Oy (2) 4, Trace from a sample of cancelled checks to the cash disbursements journal (dy QQ 5. Examine supporting documentation for a sample of transactions for authorized payee and amount and to determine services or goods were received. a) @) Answer: 1.1) DQ)X 2.) CQ)X 3. (IF Q)Z 4.()BQ)W S.(AQ)V Terms: Management assertions and transaction-related audit objectives Diff, Challenging Objective: LO 6-9 AACSB: Analytic thinking 35 Copyright © 2017 Pearson Edueation, Inc.8) General transaction-related audit objectives vary from audit to audit, depending on the nature and characteristics of the client's business and industry, Answer: FALSE Terms: General transaction-related audit objectives Diff, Moderate Objective: LO 6-9 AACSB: Reflective thinking 9) The audit objective of posting and summarization is associated with the management assertion of accuracy. Answer: TRUE Terms: Audit objective of posting and summarization; Accuracy management assertion Diff: Moderate Objective: LO 6-9 AACSB: Reflective thinking 10) The transaction-related audit objective of timing is related to the assertion of cutoff, Answer: TRUE Terms: Transaction-related audit objective of timing; Cutoff assertion Diff, Moderate Objective: LO 6-9 AACSB: Reflective thinking 11) Ifa sale was for a valid shipment, but the amount of the sales invoice was calculated incorrectly, the accuracy objective was violated. Answer: TRUE Terms: General transaction-related audit objectives Diff, Moderate Objective: LO 6-9 AACSB: Reflective thinking 12) The effect of a violation of the completeness transaction-related audit objective for cash disbursements transactions would be an overstatement of cash disbursements. Answer: FALSE Terms: Completeness transaction-related audit objective Diff: Moderate Objective: LO 6-9 AACSB: Reflective thinking 13) The transaction-related audit objective that deals with whether recorded transactions have actually occurred is the completeness objective. Answer: FALSE Terms: Transaction-related audit objective; Completeness objective Diff: Moderate Objective: LO 6-9 AACSB: Reflective thinking 36 Copyright © 2017 Pearson Edueation, Inc.6.10 Learning Objective 6-10 1) In testing for cutoff, the objective is to determine A) whether all of the current period's transactions are recorded. B) whether transactions are recorded in the correct accounting period. C) the proper cutoff between capitalizing and expensing expenditures. D) the proper cutoff between disclosing items in footnotes or in account balances. Answer: B Terms: Objective in testing cutoff Diff, Moderate Objective: LO 6-10 AACSB: Reflective thinking 2) The detail tie-in objective is not concerned that the details in the account balance A) agree with related subsidiary ledger amounts, B) are properly disclosed in accordance with GAAP. C) foot to the total in the account balance. D) agree with the total in the general ledger. Answer: B Terms: Detail tie-in objective Diff: Moderate Objective: LO 6-10 AACSB: Reflective thinking 3) The detail tie-in is part of the assertion for account balances A) classification B) valuation and allocation. C) rights and obligations D) completeness Answer: B Terms: Detail tie-in is and assertion for account balances Diff Moderate Objective: LO 6-10 AACSB: Reflective thinking 4) The classification balance-related audit objective A) involves determining if items included on a client's listing are included in the correct general leger accounts, B) is the counterpart to the management assertion of completeness. C) involves determining if items included on a client's listing are disclosed properly in the financial statements. D) involves tying in the account balances to the general ledger. Answer: A Terms: Balance-related audit objecti Diff: Moderate Objective: LO 6-10 AACSB: Reflective thinking 37 Copyright © 2017 Pearson Edueation, Inc.5) Balance-related audit objectives A) are never applied to income statement accounts. B) are designed to detect fraud C) provide a framework to help the auditor accumulate sufficient appropriate evidence related to account balances. D) can have only one specifie-related audit objectives. Answer: C Terms: Balance-related audit objectives Diff, Moderate Objective: LO 6-10 AACSB: Reflective thinking 6) Which of the following statements is not true? A) Balance-related audit objectives are applied to ending account balances. B) Transaction-related audit objectives are applied to classes of transactions. C) Balance-related audit objectives are applied to the ending balance in balance sheet accounts. D) Balance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts. Answer: D Terms: Balance-related and transaction-related audit objectives Diff: Moderate Objective: LO 6-10 AACSB: Reflective thinking 7) Determining that the footnote of the audit objective. A) occurrence B) completeness C) presentation and disclosure D) classification and understandability Answer: C Terms: Presentation and disclosure-related objectives Diff: Easy Objective: LO 6-10 AACSB: Reflective thinking osures related to long-term debt are accurate is an example 38 Copyright © 2017 Pearson Edueation, Inc.8) An important balance-related audit objective is realizable value. Describe the purpose of this audit objective, what it is concemed with, and give an example. Answer: The purpose of this audit objective is to make sure that assets are included on the balance sheet at the amounts estimated to be realized. It is concerned with whether an account balance has been reduced for declines from historical cost or when accounting standards require a fair value accounting treatment for the account. It is concerned with valuation and allocation. It generally applies only to asset accounts, although some liabilities are recorded at fair value. Examples include the allowance for uncollectible accounts, and write-downs of inventory for obsolescence. Terms: Balance-related objective of realizable value Diff: Challenging Objective: LO 6-10 AACSB: Reflective thinking 39 Copyright © 2017 Pearson Edueation, Inc.9) Below are five audit procedures, all of which are tests of balances associated with the audit of accounts receivable. Also below are the eight general balance-related audit objectives and the four management assertions. For each audit procedure, indicate (1) its audit objective, and (2) the management assertion being tested \Audit Objectives \Assertion [A. existence IV. existence IB. completeness IW. completeness °. accuracy valuation and allocation DD. classification \Y. rights and obligations IE. cutott IF. detail tie-in 3. realizable value rights and obligations 1. Obtain an aged listing of accounts receivable. For a sample of individual customers on the listing, agree the customer's name, amount, and other information with the corresponding information in the accounts receivable master file aw @) 2. Examine details of sales for five days before and five days after year-end to determine whether sales have been recorded in the proper period. a) Qe 3. Assess the reasonableness of the balance in the allowance for doubtful accounts, dQ @) 4. Inquire as to whether any accounts receivable have been factored or sold during the period. ad) QQ 5. Inquire as to whether there are any receivables from related parties. dy @) Answer: L()FQ)X 2(EQ)X 3.(I)GQ)X 4. ()HQ)Y 5.(1)D(Q)X Terms: Management assertions and balance-related audit objectives Diff, Challenging Objective: LO 6-10 AACSB: Analytic thinking 40 Copyright © 2017 Pearson Edueation, Inc.10) Balance-related audit objectives follow from management assertions Answer: TRUE Terms: Balance-related audit objectives Diff: Easy Objective: LO 6-10 AACSB: Reflective thinking 11) Balance-related audit objectives are usually applied to the ending balance in income statement accounts; transaction-related audit objectives are usually applied to transactions reflected in balance sheet accounts. Answer: FALSE Terms: Balance-related audit object Diff: Moderate Objective: LO 6-10 AACSB: Reflective thinking cs; Transaction-related audit objectives 12) Tests of details of balances typically involve the use of comparisons and relationships to assess the overall reasonableness of account balances Answer: FALSE Terms: Tests of details of balances Diff Easy Objective: LO 6-10 AACSB: Reflective thinking 13) The general balance-related audit objective that deals with determining that details in the account balance agree with related master file amounts, foot to the total in the account balance, and agree with the total in the general ledger is the detail tie-in objective. Answer: TRUE Terms: Detail tie-in objective; General balance-related objective Diff: Moderate Objective: LO 6-10 AACSB: Reflective thinking 14) The cutoff objective, "transactions near the balance sheet date are recorded in the proper period,” is a balance-related audit objective. Answer: TRUE Terms: Cutoff objective; Balance-related audit objective Diff Moderate Objective: LO 6-10 AACSB: Reflective thinking 4l Copyright © 2017 Pearson Edueation, Inc.15) The presentation and disclosure-related audit objectives are identical to the management assertions for presentation and disclosure. Answer: TRUE Terms: Presentation and disclosure-related objectives Diff: Easy Objective: LO 6-10 AACSB: Reflective thinking 6.11 Learning Objective 6-11 1) The procedures used to test the effectiveness of the internal controls are known as A) tests of transactions. B) tests of controls. C) substantive analytical procedures, D) control risk. Answer: B Terms: Tests of controls Diff: Easy Objective: LO 6-11 AACSB: Reflective thinking 2) Which of the following statements is not correct? A) There are many ways an auditor can accumulate evidence to meet overall audit objectives, B) Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. C) Itis appropriate to minimize the cost of accumulating evidence. D) Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects. Answer: D Terms: Considerations for accumulating evidence Diff: Moderate Objective: LO 6-11 AACSB: Reflective thinking 2 Copyright © 2017 Pearson Edueation, Inc.3) Two overriding considerations affect the many ways an auditor can accumulate evidence 1. Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. 2. Cost of accumulating evidence should be minimized, In evaluating these considerations A) the first is more important than the second. B) the second is more important than the first. C) they are equally important. D) itis impossible to prioritize them. Answer: A Terms: Considerations for accumulating evidence Diff, Moderate Objective: LO 6-11 AACSB: Reflective thinking 4) If the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control, assessing control risk, testing controls, and analytical procedures, then the auditor ‘A) can issue an unqualified opinion. B) can significantly reduce other substantive tests C) can write the engagement letter. D) needs to perform additional tests of controls so that the assurance level can be increased. Answer: B Terms: Auditor obtained reasonable level of assurance about fair presentation Diff: Moderate Objective: LO 6-11 AACSB: Reflective thinking 5) After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on A) generally accepted auditing standards. B) the AICPA's Code of Professional Conduct. C) generally accepted accounting principles D) the auditor's professional judgment. Answer: D Terms: After auditor completed all audit procedures Diff: Moderate Objective: LO 6-11 AACSB: Reflective thinking. 4B Copyright © 2017 Pearson Edueation, Inc.