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18 MCQ and 7 Questions

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1. (TCO 1) Which of the following accurately depicts the auditor’s responsibility with respect to Statements on Auditing Standards? (Points : 5)

The auditor is required to follow the guidance provided by the standards, without exception.
The auditor is generally required to follow the guidance provided by standards with which he or she is familiar, but will not be held responsible for departing from provisions of which he or she was unaware.
The auditor is generally required to follow the guidance provided by the standards, unless following such guidance would result in an audit that is not cost-effective.
The auditor is generally required to follow the guidance provided by the standards and should be able to justify any departures.

 

Question 2.2. (TCO 2) When an auditor submits a document containing audited financial statements to a client, and those financial statements include supplementary information required by GAAP, the auditor may choose any of the following options, except (Points : 5)

express an opinion on the information, if he or she has been engaged to examine such information.
express negative assurance on the information, if review procedures have been appropriately performed.
report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate procedures have been applied.
disclaim an opinion on the information.

 

Question 3.3. (TCO 2) In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?(Points : 5)

The auditor did not observe the entity’s physical inventory and is unable to become satisfied about its balance by other auditing procedures.
Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a concern are inadequately disclosed.
There has been a change in accounting principles that has a material effect on the comparability of the entity’s financial statements.
The auditor is unable to apply necessary procedures concerning an investor’s share of an investee’s earnings recognized on the equity method.

 

Question 4.4. (TCO 3) Which of the following is not an example of the application of professional skepticism? (Points : 5)

Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion
Obtaining corroboration of management’s explanations through consultation with a specialist
Inquiring of prior year engagement personnel regarding their assessment of management’s honesty and integrity
Using third-party confirmations to provide support for management’s representations

 

Question 5.5. (TCO 3) Jackson & Company, CPAs, plan to audit the financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley Act of 2002. Which of the following situations would impair Jackson’s independence? (Points : 5)

Provision of personal tax services to Johnson, the accounts payable manager of Perigee
Preparation of Perigee’s routine annual tax return, where Jackson’s fee will be calculated as a percentage of the tax refund obtained
An audit of Perigee’s internal control is performed contemporaneously with the annual financial statement audit
Discovering that Lowe, the chief financial officer of Perigee, started his accounting career 10 years earlier as a staff accountant for Jackson & Company, and continues to maintain ties with current partners at the firm

 

Question 6.6. (TCO 2) A client decides not to make an auditor’s proposed adjustments that collectively are not material, and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation? (Points : 5)

The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
The financial statements do not conform with generally accepted accounting principles (GAAP).
The financial statements contain unadjusted misstatements that should result in a qualified opinion.
The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.

 

Question 7.7. (TCO 5) The study of the client’s internal control by the auditor is (Points : 5)

required by GAAP.
required by the IRS.
recommended by the AICPA.
required by GAAS.

 

Question 8.8. (TCO 6) Which of the following types of documentary evidence should the auditor consider to be the most reliable? (Points : 5)

A sales invoice issued by the client and supported by a delivery receipt from an outside trucker
Confirmation of an accounts payable balance mailed by and returned directly to the auditor
A check, issued by the company and bearing the payee’s endorsement, that is included with the bank statements mailed directly to the auditor
An audit schedule prepared by the client’s controller, and reviewed by the client’s treasurer

 

Question 9.9. (TCO 7) A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account, before considering the effectiveness of the client’s internal control, is the (Points : 5)

acceptable audit risk.
control risk.
inherent risk.
statistical risk.

 

Question 10.10. (TCO 8) In setting materiality guidelines for current assets, the two standard setters, FASB and the AICPA, provide the following guidelines to practitioners (Points : 5)

both agree that it should be greater than 5%.
both agree that materiality should be set at an amount greater than 10% of current assets.
both agree that materiality should be set at an amount greater than 10% of current assets.
no specific materiality guidelines are provided by either of them.

 

Question 11.11. (TCO 9) Which of the following best illustrates the concept of sampling risk? (Points : 5)

The documents related to the chosen sample may not be available to the auditor for inspection.
An auditor may fail to recognize errors in the documents from the sample.
A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.
An auditor may select audit procedures that are not appropriate to achieve the specific objective.

 

Question 12.12. (TCO 10) When auditing around the computer, the auditor performs tests of (Points : 5)

general computer controls, but does not test application computer controls.
application computer controls, but does not test general computer controls.
neither general nor application computer controls.
both general and application computer controls.

 

Question 13.13. (TCO 11) Which of the following is not a condition for a contingent liability to exist? (Points : 5)

There is a potential future payment to an outside party that would result from a current condition.
There is uncertainty about the amount of the future payment.
The outcome of an uncertainty will be resolved by some future event.
The amount of the future payment is reasonably estimable.

 

Question 14.14. (TCO 5) Which of the following audit tests would be regarded as a test of a control? (Points : 5)

Tests of the specific items making up the balance in a given general ledger account
Tests of the inventory pricing to vendor’s invoices
Tests of the signatures on canceled checks to the board of directors’ authorizations
Tests of the additions to property, plant, and equipment by physical inspections

 

Question 15.15. (TCO 5) Which of the following types of evidence is not available when using substantive tests of transactions? (Points : 5)

Documentation
Confirmation
Inquiries of the client
Reperformance

 

Question 16.16. (TCO 6) Which of the following is not a potential effect of an auditor’s decision that a higher acceptable audit risk is appropriate? (Points : 5)

The same amount of audit evidence would be required.
Less evidence is required.
More evidence is required.
None of the above

 

Question 17.17. (TCO 6) Which of the following statements is correct regarding the costs involved in obtaining evidence? (Points : 5)

Cost of obtaining evidence is a valid reason for excluding that evidence from the audit.
Physical examination is the most expensive type of audit evidence.
The least expensive type of evidence is analytical procedures.
Each of the above is correct

 

Question 18.18. (TCO 9) The acceptable risk of assessing control risk (ARACR) too low has a significant effect on sample size. The relationship of ARACR to sample size is (Points : 5)

variable (sometimes larger, sometimes smaller).
direct (larger ARACR = larger sample).
inverse (larger ARACR = smaller sample).
not determinable.

 

 

  1. (TCO 2) Lose Big Inc., a U.S. company, is a defendant in a lawsuit alleging infringement of certain patent rights. However, the ultimate outcome of the litigation cannot be reasonably estimated by management. Janice Jones, CPA, believes there is a reasonable possibility of a significant material loss, but the lawsuit is adequately disclosed in the notes to the financial statements.

From the following opinion types, select and write the opinion type or types that can be used by the auditor. Up to two opinion types can be selected.

In addition, select and write the appropriate report modification options that are required to be made by the auditor. You can select as many options as apply. (Becker, Adopted)

Opinion Options

  1. Unmodified
  2. Except for qualified
  3. Adverse
  4. DisclaimerReport Modification Options

Issue the independent auditor’s report without modification
Modify the introductory paragraph
Modify the auditor’s responsibility paragraph
Omit the auditor’s responsibility paragraph
Modify the opinion paragraph
Add an emphasis-of-matter paragraph preceding the opinion paragraph
Add an emphasis-of-matter paragraph following the opinion paragraph

  1. (TCO 4) Distinguish between audit risk and audit failure.(Points : 25)
  2. (TCO 2) Discuss three major differences between operational and financial auditing.(Points : 30)
  3. (TCO 3) Fraud was extensively discussed in this class. There are three conditions that must be present for management fraud to exist. First, identify each of these three conditions. Then, for each condition, identify two risk factors related to the risk of misappropriation of assets.
    (Points : 30)
  4. (TCO 7) Discuss how each of the following influences the persuasiveness of evidence.
  5. (TCO 3) Distinguish between management’s responsibility and the auditor’s responsibility for the financial statements under audit.(Points : 30)
  6. (TCO 3) Assess the impact Enron has had on the auditing and accounting profession. Evaluate the industry’s response to date. Were the changes implemented enough to restore investor confidence and the public’s opinion of the auditing and accounting profession?(Points : 30)