Question 1

The valuation assertion includes:
A)The measurement assumption used.
B)Ensuring all inventory is counted.
C)Making sure that all receivables relate to sales during the year.
D)The method of presenting short term and long term liabilities.

Accepted Answer

The valuation assertion involves ensuring that assets and liabilities are recorded at appropriate amounts, which includes the measurement assumption used.

Question 2

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations.If management is unable to provide an acceptable explanation, the auditor should
A)Consider the matter a scope limitation.
B)Perform additional audit procedures to investigate the matter further.
C)Intensify the audit with the expectation of detecting management fraud.
D)Withdraw from the engagement.

Accepted Answer

The auditor should perform additional audit procedures to investigate the unexplained differences further, as this is part of their responsibility to obtain sufficient appropriate audit evidence.

Question 3

How should auditors use the concept of materiality?
A)As a guide to assessing inherent risk
B)As a guide in assessing control risk.
C)As a guide in deciding to report a deficiency to the audit committee.
D)As a guide in planning the audit program.

Accepted Answer

Auditors should use the concept of materiality as a guide in planning the audit program. Materiality helps auditors to determine the nature, timing, and extent of audit procedures to be performed. Materiality is used as a threshold for determining what information is important enough to be disclosed and what can be ignored. It is not used to guide the assessment of inherent or control risk, nor is it used to decide whether or not to report a deficiency to the audit committee.

Question 4

This question tests your ability to perceive the place(s) where potential problems may exist and the type of problem (overstatement or understatement) that may exist.
Required:
For each of the items below, identify the account(s) that need(s) to be audited carefully and the reason; for example, "potential overstatement or understatement of ."
A) Current year accounts receivable is larger than last year but the allowance for doubtful accounts is the same.
B) Current year inventory is larger than last year but the current year gross margin (profit) is larger.
C) Current year long-term liabilities are larger than last year but the interest expense is the same.
D) Current year fixed assets total is larger than last year but current amortization expense is the same as last year.

Accepted Answer

The answer of This question tests your ability to perceive...

Question 5

In the planning stage, analytical procedures are used to
A)Assess overall reasonableness of the financial statements.
B)Identify potential problem areas.
C)Determine the mathematical correctness of the financial statements.
D)Provide direct evidence about the balances in accounts.

Accepted Answer

Analytical procedures in the planning stage are primarily used to identify potential problem areas by analyzing trends and ratios to highlight unusual transactions or events.

Question 6

This question is about the auditor's concept of materiality considered in the planning stage of the audit.
Required:
A) Define or describe the independent auditor's concept of "planning materiality."
B) Name (but do not describe or explain) three common relationships or considerations used by the auditor quantifying materiality.

Accepted Answer

The answer of This question is about the auditor's concept...

Question 7

If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on
A)Absolute size.
B)Relative size.
C)Nature of the item.
D)Cumulative effects.

Accepted Answer

Using a percentage of income before taxes as a basis for materiality is an example of relative size, as it considers the size of the item in relation to the financial statements as a whole.

Question 8

Analytical procedures consist of evaluating financial information by studying financial
and non -financial data and looking for plausible or implausible relationships.The procedures can range from making simple comparisons to using complex models involving many relationships and elements of data.They can involve time-series comparisons of recorded amounts, ratios developed from recorded amounts and they always include comparison to expectations developed by the auditors.
Required:
A) Describe the broad purposes of analytical procedures.
B) Identify the sources of information from which an auditor develops expectations.

Accepted Answer

The answer of Analytical procedures consist of evaluating financial information...

Question 9

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense,
A)Income would be overstated.
B)Income would be understated.
C)Income would not be misstated.
D)Accounts receivable would be understated.

Accepted Answer

Writing off fictitious accounts receivable as bad debt expense would offset the initial overstatement of income from recording fictitious sales, resulting in no net misstatement of income.

Question 10

Analytical procedures are one type of evidence gathering procedure.According to auditing standards, there are five general forms of analytical procedures.Auditing standards also provide examples of five sources of information for analytical procedures.
Required:
Describe three of the five general forms of analytical procedures.For each form, describe a typical source of the information for the form.For each source, include any questions or concerns an auditor would have about the reliability or relevancy of the source.

Accepted Answer

The answer of Analytical procedures are one type of evidence...

Question 11

Three key management assertions about items on the balance sheet are:
A)Occurrence, completeness and accuracy.
B)Classification, existence and cut-off.
C)Confirmation, presentation and disclosure.
D)Existence, completeness and presentation.

Accepted Answer

Existence, completeness, and presentation are key management assertions for balance sheet items, ensuring that assets and liabilities exist, are fully recorded, and properly presented.

Question 12

Contrast horizontal and vertical analysis.Give an example of each.

Accepted Answer

The answer of Contrast horizontal and vertical analysis.Give an example...

Question 13

A bank with a large loan would most likely be interested in materiality based on:
A)Operating cash flows.
B)Normalized net income.
C)Sales revenue.
D)Net assets.

Accepted Answer

The answer of A bank with a large loan would...

Question 14

The concept of materiality refers to:
A)Any misstatement in the financial statements.
B)The overall degree of risk in an organization.
C)An amount of misstatement that could lead someone to make a poor decision and suffer a loss.
D)An amount of risk in an organization sufficient to offset the expected returns of any investment in the company.

Accepted Answer

Materiality refers to the significance of an amount, transaction, or discrepancy that could influence the economic decisions of users taken on the basis of the financial statements.

Question 15

What is meant by materiality?

Accepted Answer

The answer of What is meant by materiality?...

Question 16

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:
A)As a substantive test and in the final review stage.
B)As a substantive test but not in the final review stage.
C)In the final review stage but not as a substantive test.
D)Neither in the final review stage nor as a substantive test.

Accepted Answer

Analytical procedures are required in the final review stage of an audit to assist the auditor in forming an overall conclusion about the financial statements. They are not required as a substantive test, though they can be used as such at the auditor's discretion.

Question 17

The compliance assertion is not normally listed as a separate assertion.It requires an auditor to assess:
A)How well company procedures control risk.
B)How well company employees comply with codes of conduct.
C)How well company personnel follow internal controls.
D)How well a company's strategy is being implemented.

Accepted Answer

The compliance assertion requires an auditor to assess how well company employees comply with codes of conduct.

Question 18

The audit objective specifying that "all recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses" is related most closely to which assertion(s)?
A)Existence or occurrence
B)Rights and obligations
C)Completeness
D)Presentation and disclosure

Accepted Answer

The audit objective of ensuring that recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses is closely related to the assertion of existence or occurrence, which ensures that the items being recorded actually exist and have occurred. By ensuring the existence or occurrence of these items, the auditor can be confident that the financial statements are presenting a true and fair view of the company's financial position and performance. The other assertions (rights and obligations, completeness, and presentation and disclosure) are related to different aspects of financial statement presentation and would not be as closely tied to this particular audit objective.

Question 19

The overall audit strategy typically includes:
A)The detailed audit plan.
B)Specific procedures for determining inherent and control risk.
C)Decisions about unusual client accounting principles.
D)Audit evidence gathering procedures.

Accepted Answer

The overall audit strategy includes decisions about unusual client accounting principles, as it sets the scope, timing, and direction of the audit, but does not include detailed plans or specific procedures.

Question 20

Which of the following is likely to be found in the minutes of the board of directors?
A)Approval of customer credit limits.
B)Approval of a new computer for the controller.
C)Authorization of employee salaries.
D)Authorization of executive salaries.

Accepted Answer

The answer of Which of the following is likely to...

Quiz 6: Preliminary Audit Planning: Understanding the Auditee

The valuation assertion includes:

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the auditor's expectations.If management is unable to provide an acceptable explanation, the auditor should

How should auditors use the concept of materiality?

In the planning stage, analytical procedures are used to

If an auditor were to use 5% of income before taxes as a basis for materiality, it would be an example of judgment based on

If fictitious sales were recorded and the fictitious accounts receivable were written off as bad debt expense,

Three key management assertions about items on the balance sheet are:

Contrast horizontal and vertical analysis.Give an example of each.

A bank with a large loan would most likely be interested in materiality based on:

The concept of materiality refers to:

What is meant by materiality?

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

The compliance assertion is not normally listed as a separate assertion.It requires an auditor to assess:

The audit objective specifying that "all recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses" is related most closely to which assertion(s) ?

The overall audit strategy typically includes:

Which of the following is likely to be found in the minutes of the board of directors?