Question 1

Which of the following is the least persuasive documentation in support of an auditor's opinion?

Accepted Answer

A)  Schedules of details of physical inventory counts conducted by the entity.
B)  Notation of auditor's inferences drawn from ratios and trends.
C)  Notation of an independent appraiser's conclusions documented in the auditor's working papers.
D)  Lists of negative confirmation requests for which no response was received by the auditor. A

Question 2

The text discusses three main categories of audit procedures. List and describe these three main categories of audit procedures and describe their purpose.

Accepted Answer

Risk assessment procedures: Risk assessment procedures are performed to obtain an understanding of the entity and its environment, including its internal control, in order to assess the risks of material misstatement at the financial statement and assertion levels.
Tests of controls: Tests of controls allow the auditor to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
Substantive procedures: Substantive procedures are performed to detect material misstatements at the assertion level.

Question 3

Which of the following types of documentary evidence should the auditor consider to be the most reliable?

Accepted Answer

A)  A sales invoice issued by the entity and supported by a delivery receipt from an outside trucker.
B)  Confirmation of an account payable balance mailed by and returned directly to the auditor.
C)  A check issued by the company and bearing the payee's endorsement that is included with the bank statement mailed directly to the auditor.
D)  A working paper prepared by the entity's controller and reviewed by the entity's treasurer. B

Question 4

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

Accepted Answer

A)  "I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined."
B)  "I would not undertake that procedure because at best the results would only be persuasive and I'm looking for convincing evidence."
C)  "I evaluate the degree of risk involved in deciding the kind of evidence I will gather."
D)  "I evaluate the quality of the evidence I can obtain, prior to choosing evidence."

Question 5

When using analytical procedures, the auditor first needs to develop an expectation with which to compare recorded results. What is meant by "precision of the expectation," and what factors affect the precision of analytical procedures?

Accepted Answer

The answer of When using analytical procedures, the auditor first...

Question 6

In creating lead schedules for an audit engagement, what financial information is needed to begin?

Accepted Answer

A)  Interim financial information, such as third quarter sales, net income, and inventory and receivables balances.
B)  Specialized journal information, such as the invoice and purchase order numbers of the last few sales and purchases of the year.
C)  General ledger information, such as account numbers, prior-year account balances, and current year unadjusted information.
D)  Adjusting entry information, such as deferrals and accruals and reclassification journal entries.

Question 7

Who is responsible for the financial statements? What does the term "assertions" mean? Identify the assertion categories and the specific assertions for each category.

Accepted Answer

The answer of Who is responsible for the financial statements?...

Question 8

The audit testing hierarchy is considered to be more effective and more efficient. Why?

Accepted Answer

The answer of The audit testing hierarchy is considered to...

Question 9

Which of the following presumptions does not relate to the appropriateness of audit evidence?

Accepted Answer

A)  The more effective the internal control system, the more assurance it provides about the accounting data and financial statements.
B)  An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost.
C)  Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.
D)  The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

Question 10

For an auditor, how are management assertions useful?

Accepted Answer

The answer of For an auditor, how are management assertions...

Question 11

Tracing is used primarily to test which of the following assertions about classes of transactions?

Accepted Answer

A)  Occurrence.
B)  Completeness.
C)  Cutoff.
D)  Classification.

Question 12

Several factors may influence the reliability of evidence. Identify and describe two of these factors.

Accepted Answer

The answer of Several factors may influence the reliability of...

Question 13

An auditor's analytical procedures performed during the overall review stage indicated that the entity's accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following explanations most likely would satisfy the auditor?

Accepted Answer

A)  The entity liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings.
B)  Twice as many accounts receivable were written off in the prior year than in the current year.
C)  A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.
D)  The entity opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Question 14

Which of the following would be least likely to be comparable between similar corporations in the same industry or line of business?

Accepted Answer

A)  Earnings per share.
B)  Return on total assets before interest and taxes.
C)  Accounts receivable turnover.
D)  Operating cash flow.

Question 15

You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about?

Accepted Answer

A)  Existence or occurrence.
B)  Completeness.
C)  Rights and obligations.
D)  Accuracy.

Question 16

Audit documentation is the principal record of the audit and provides the principal support for the representations in the auditor's report. Because of this, audit documentation should do all of the following except for:

Accepted Answer

A)  demonstrate how the audit complied with auditing and related professional practice standards.
B)  support the audit firm's human resource department in employee retention decisions.
C)  support the basis for the auditor's conclusions concerning each material financial statement assertion.
D)  demonstrate that the underlying accounting records agreed or reconciled with the financial statements.

Question 17

Management assertions fall into four main categories.

Accepted Answer

A) True 
 B)False

Question 18

As a result of analytical procedures conducted during the planning phase, the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should:

Accepted Answer

A)  Express an opinion that is qualified due to the inability of the company to continue as a going concern.
B)  Evaluate management's performance in causing this decline.
C)  Require footnote disclosure.
D)  Consider the possibility of an error in the financial statements.

Question 19

A not-for-profit organization published a monthly magazine that had 15,000 subscribers on January 1, 2013. The number of subscribers increased steadily throughout the year and on December 31, 2013, there were 16,200 subscribers. The annual magazine subscription cost was $10 on January 1, 2013 and was increased to $12 for new members on April 1, 2013. Subscriptions are paid in full at the beginning of the member term. An auditor should expect that the revenue from subscriptions for the year ended December 31, 2013, would be approximately:

Accepted Answer

A)  $179,400.
B)  $171,600.
C)  $164,400.
D)  $163,800.

Question 20

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:

Accepted Answer

A)  fraud exists within the relevant accounts.
B)  internal control activities are not operating effectively.
C)  additional tests of details are required.
D)  the communication with the audit committee should be revised.

Exam 5: Evidence and Documentation