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Accounting 408 Name _____________________________

Exam 2, Chapters 3-6, E

Fall 2016 Section _______ Row _______

Multiple Choice. (100 points total test) Read the following questions carefully and indicate the one best

answer to each question by placing a mark in the appropriate space on the answer sheet.

1. Which of the following is not a way in which auditors use the concept of materiality?

a. As a guide for determining lack of independence from a direct financial interest.

b. As a guide for making decisions about the audit report.

c. As a guide to determine tolerable error.

d. As a guide to planning the audit program.

2. Which of the following is least likely to be considered a risk assessment procedure?

a. observation of the performance of certain accounting procedures

b. making test counts of the client’s inventory balances

c. inspection of the company’s organizational chart

d. inquiry with management

3. Which of the following audit procedures most likely would provide an auditor with the most assurance

about the effectiveness of the operation of a client's internal control?

a. substantive tests of control procedures

b. reperformance of client’s control procedures

c. inquiry of client personnel about control procedures

d. confirmation with outside parties about the control procedures

4. Tracing bills of lading (shipping documents) to sales invoices provides evidence that

a. invoiced sales were recorded in the sales journal.

b. recorded sales were shipped.

c. shipments to customers were recorded in the sales journal.

d. shipments to customers were invoiced.

5. The primary objective of studying and evaluating a nonissuer's internal control structure is to provide an

auditor with

a. an evaluation of the need to conduct further preliminary analytical procedures.

b. a basis for determining whether to accept the client.

c. evidential matter to use in assessing whether material weaknesses or significant deficiencies exist.

d. knowledge necessary for planning the extent of tests of controls and substantive tests.

6. Which of the following is not one of the three fraud triangle factors usually evident in every fraud?

a. rationalization

b. secret knowledge

c. opportunity

d. pressure

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7. Which portion of an audit is most likely to be completed before the balance sheet date?

a. substantive procedures

b. issuance of audit report

c. obtaining an understanding of the control structure

d. communication of material weaknesses over internal control

8. When conducting an audit of a nonissuer, the auditor must perform which of the following related to the

company's internal control?

a. Tests of controls to evaluate the company's control system effectiveness.

b. Determining whether the company's control policies and procedures are effective at preventing

material errors.

c. Preparing auditing work papers documenting the understanding of the company's internal control.

d. Designing procedures to search for significant deficiencies in the actual operation of the company's

internal control.

9. Sampling risk can occur in which of the following types of sampling plans?

Statistical Nonstatistical

Sampling sampling

a. No No

b. No Yes

c. Yes No

d. Yes Yes

10. In testing the completeness assertion for an account on the balance sheet, an auditor ordinarily

a. examines transactions occurring a few days before and after the balance sheet date.

b. works from the shipping documents to the customers’ orders.

c. works from the supporting evidence to the financial statements.

d. works from the financial statements to the shipping documents.

11. If all other factors specified in an attributes sampling plan remain constant, increasing the tolerable rate and

decreasing the estimated population deviation rate would have what effect on sample size?

a. indeterminate, depends upon exact changes being made

b. decrease

c. remain the same

d. increase

12. Selecting a sample of shipping documents from the shipping department file and tracing the shipments to

recorded sales invoices is an example of which of the following types of procedures?

a. walkthrough procedure

b. analytical procedure

c. risk assessment procedure

d. test of control procedure

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13. The performance principle recognizes that early appointment of the independent auditors has many

advantages to the auditors and the client. Which of the following advantages is least likely to occur as a

result of early appointment of the auditors?

a. auditors will be able to perform the examination more efficiently and will be finished at an earlier date

after the year-end

b. auditors will be able to better plan for the observation of the physical inventories

c. auditors will be able to substantially reduce substantive procedures

d. auditors will be able to plan the audit work so that it may be done more efficiently

14. The overall attitude and awareness of an entity's management and board of directors concerning the

importance of the client's internal control is reflected in its

a. safeguards over access to assets.

b. control environment.

c. system of segregation of duties.

d. computer-based controls.

15. Before accepting an engagement to audit a new client, an auditor is required to attempt to

a. make inquiries of the predecessor auditor.

b. obtain approval from the prospective client's audit committee for all nonaudit services planned.

c. discuss with the prospective client's audit committee the proposed engagement letter.

d. obtain an understanding of the business, including its internal control, sufficient to plan the audit.

16. Assessing control risk at a low level most likely would involve

a. identifying specific internal control policies and procedures that appear to be effective.

b. changing timing of substantive tests by omitting interim-date testing and performing tests at year end.

c. little or no tests of controls.

d. changing substantive testing to include performing more extensive tests with larger sample sizes than

originally planned.

17. After auditors assess RMM at a high level, they will tend to

a. perform a great deal of risk assessment procedures.

b. perform a great deal of walkthroughs.

c. perform a great deal of substantive tests.

d. perform a great deal of tests of controls.

18. Based on the video shown in class, the ZZZZ Best fraud

a. involved an employee that hid stolen money in the walls of his house.

b. involved a bookkeeper for a small business located in Lincoln, Nebraska.

c. resulted in a long jail sentence for an employee in an insurance agency.

d. was perpetrated by an individual that started a carpet cleaning business as a teenager.

19. An auditor uses the assessed level of RMM to

a. determine the acceptable level of detection risk for financial statement assertions.

b. indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.

c. identify transactions and account balances where inherent risk is at the maximum.

d. determine the beta risk level for statistical sampling plans.

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20. The successor auditor is not required to ask the predecessor auditor about

a. the predecessor's understanding about the reasons for the change of auditors.

b. the assessment of the risk of material misstatement.

c. disagreements the predecessor may have had with management about accounting principles and audit

procedures.

d. facts that might bear on the integrity of management.

21. Most frauds are discovered by

a. governmental regulatory agencies.

b. law enforcement investigations.

c. independent audits.

d. tips.

22. After assessing the RMM in the audit of a nonissuer, and regardless of the assessed level, an auditor would

always perform some

a. substantive tests to restrict detection risk to the appropriate level for significant accounts.

b. analytical procedures to verify the design of internal control procedures.

c. tests of controls to determine the effectiveness of internal control procedures.

d. procedures to obtain an understanding of the client and its environment.

23. The probability that an auditor's conclusion based on a sample might be different from the conclusion based

on the entire population identifies the concept of

a. sampling risk.

b. statistical sampling risk.

c. nonsampling risk.

d. confidence level risk.

24. Which of the following would heighten an auditor's concern about the risk of fraudulent financial

reporting?

a. increase in sales with a corresponding increase in receivables

b. an increase in labor costs

c. management's lack of interest in increasing the dividend paid on common stock

d. inability to generate positive cash flows from operations, while reporting large increases in earnings

25. When the auditors have chosen to test a control, what relationship will the tolerable rate normally have

when compared to the expected rate of deviations in the sample?

a. Indefinite.

b. Be less than.

c. Equal.

d. Exceed.

26. The "obtaining an understanding" work phase of internal control evaluation would not give auditors an

overall knowledge about the client's

a. monitoring activities.

b. control procedure effectiveness.

c. information and communication system.

d. control environment.

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27. For effective internal control, which of the following functions should not be assigned to the company's

accounting department?

a. preparing financial reports

b. signing payroll checks

c. recording financial transactions

d. matching receiving reports for merchandise with vendor’s invoices

28. Which of the following is not a typical analytical procedure?

a. comparison of the financial information with budgeted amounts

b. vouching recorded balances of major disbursements with appropriate invoices

c. comparison of the financial information with similar information regarding the industry in which the

entity operates

d. study of relationships of financial information with relevant nonfinancial information

29. An auditor selects a sample from the file of shipping documents to determine whether sales invoices were

prepared for each shipment. This test is performed to satisfy the audit objective of

a. existence.

b. quality control.

c. completeness.

d. accuracy.

30. The acceptable level of detection risk is inversely related to the

a. extent of risk assessment procedures performed.

b. level of nonsampling risks in substantive tests.

c. risk of the auditor misapplying audit procedures.

d. assurance required by the auditor from the substantive tests performed.

31. Sending confirmations to all customers regarding accounts receivable balances will provide evidence most

relevant to which of the following assertions?

a. completeness

b. existence

c. cutoff

d. presentation and disclosure

32. The risk of underreliance (risk of assessing control risk too high) occurs when the sample selected to test

controls

a. contains fewer control deviations than the population as a whole.

b. contains fewer monetary errors than exist in the account balance as a whole.

c. contains misstatements that could be material to the financial statements when aggregated with

misstatements in other account balances or transaction classes.

d. does not support the auditor's planned level of control risk when the true operating effectiveness of the

control justifies such an assessment.

33. To test completeness, an auditor would sample from the

a. general ledger to the financial statements.

b. general ledger to the source documents.

c. financial statements to the general ledger.

d. financial statements to source documents.

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34. Which of the following statements is false about the auditors' consideration of internal control in a financial

statement audit of a nonissuer?

a. auditors must perform tests of controls

b. auditors must obtain an understanding of the steps in processing major types of transactions

c. auditors must prepare a description of internal control in their working papers

d. auditors must assess RMM

35. Generally accepted auditing standards state that analytical procedures

a. must be applied in the final review stage, and are optional as a substantive test and in the planning

stage.

b. must be applied in the planning stage and are optional as a substantive test and in the final review

stage.

c. must be applied in the planning and final review stages of the audit and are optional as a substantive

test during the audit.

d. must be applied in the planning, final review stages of the audit, and as a substantive test during the

audit.

36. Which of the following is generally true about the sufficiency of substantive testing audit evidence?

a. when evidence is appropriate with respect to an account it is also sufficient

b. the amount of evidence gathered concerning a particular account varies directly with the detection risk

of the account

c. the amount of evidence gathered concerning a particular account varies directly with the tolerable error

assigned to the account

d. the amount of evidence gathered concerning a particular account varies directly with the risk of

material misstatement

37. Calculating an estimate of the allowance for doubtful accounts using prior relationships of write-offs and

sales will provide evidence most relevant to which of the following assertions?

a. completeness

b. cutoff

c. rights and obligations

d. valuation

38. Which of the following types of risk is the most important to auditors in performing tests of controls?

a. the risk of incorrect rejection

b. the risk of incorrect acceptance

c. the risk of underreliance

d. the risk of overreliance

39. Assume that application of analytical procedures revealed significant unexplained differences between

recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to

provide an acceptable explanation, the auditor should first

a. assess control risk high.

b. intensify the audit with the expectation of detecting management fraud.

c. perform additional audit procedures to investigate the matter further.

d. consider the matter a scope limitation.

e. assess control risk low.

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40. Inherent risk is the

a. probability that material misstatements have occurred in transactions entering the accounting system

used to develop financial statements assuming no controls.

b. probability that the auditor may not detect material misstatements in the financial statements assuming

no controls.

c. probability that the client's internal control policies and procedures will fail to detect material

misstatements in the financial statements.

d. probability that some accounts are more susceptible to internal control breakdowns than others.

41. An issuer’s management is not responsible for which of the following?

a. certifying the financial statements

b. assessment of the effectiveness of internal control.

c. ensuring the documentation of the IT system is complete and up to date.

d. making its computer resources and knowledgeable personnel available to the auditor.

e. none of the above are correct

42. John Terry, being a bad guy employee in the accounting department of Chelsea FC, believes he can run a

fictitious invoice through the accounts payable system and collect the money himself. He knows payments

are subject to an audit. Which account would be the best place for him to hide the fraud?

a. sales revenue

b. depreciation expense

c. real estate tax expense

d. consulting services expense

43. Which of the following would be consistent with an employee stealing cash receipts from customers’

payments on account and attempting to hide the theft by not booking the general ledger entry but booking

the subsidiary ledger entry?

a. Total cash receipts from customers for the month are greater than credit sales for the month.

b. Total cash receipts from customers for the month are less than credit sales for the month.

c. The total of the accounts receivable subsidiary ledger balances is greater than the accounts receivable

control account.

d. The total of the accounts receivable subsidiary ledger balances is less than the accounts receivable

control account.

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Use this information for questions 44 – 47.

Two auditors, Mark and Molly, independently assessed the risks associated with their client's accounts

receivable. They both decide to hold audit risk at .04. Both agree that inherent risk should be set at .5 and no

analytical procedures will be performed. However, Molly evaluates the control risk as moderate (.40) while

Mark assesses it a little higher (.50). Using the audit risk model, answer the following questions.

44. What is detection risk for Mark?

a. .50

b. .25

c. .20

d. .02

e. some other amount

45. What is detection risk for Molly?

a. .50

b. .25

c. .20

d. .02

e. some other amount

46. If audit risk was changed to .06 (instead of .04) and all other factors remain unchanged except detection

risk, then detection risk for each auditor would

a. decrease.

b. increase.

c. remain unchanged.

d. cannot be determined with the information given.

47. Which auditor, Mark or Molly, will have to collect the most account balance evidence?

a. An audit would not be conducted because audits are illegal.

b. Evidence is never collected in an audit.

c. Mark.

d. Molly.

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Use the following information for questions 48 – 50.

Answer the following questions assuming an independent attribute sampling application is followed. Use the

sample size shown in the table and round (if necessary) the sample size when you determine the upper limit.

Round in the most appropriate way.

Case: A B C

Risk of Overreliance (Risk of

Assessing Control Risk Too Low)

5%

5%

10%

Tolerable Deviation Rate

7%

15%

5%

Expected Deviation Rate

1%

4%

0%

Actual Number of Deviations

Found

0

2

0

48. The sample size for Case C is

a. 25

b. 40

c. 45

d. 66

49. The computed upper limit (UEL) for Case A is (assume the number of items examined was equal to the

actual computed sample)

a. 3.8

b. 4.2

c. 4.6

d. 15.0

50. The computed upper limit (UEL) for Case C is (assume the number of items examined was equal to the

actual computed sample)

a. 10.2

b. 8.4

c. 6.5

d. 5.0

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Que. No. Key

1 1

2 2

3 2

4 4

5 4

6 2

7 3

8 3

9 4

10 3

11 2

12 4

13 3

14 2

15 1

16 1

17 3

18 4

19 1

20 2

21 4

22 1

23 1

24 4

25 4

26 2

27 2

28 2

29 3

30 4

31 2

32 4

33 1

34 1

35 3

36 4

37 4

13

38 4

39 3

40 1

41 5

42 4

43 4

44 5

45 3

46 2

47 3

48 3

49 3

50 4

1 1