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
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
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
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.
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.
7) The profession has developed professional judgment frameworks that illustrate an effective
decision-making process.
8) During the professional judgment process, the analysis may identify only one appropriate
response to the issue.
9) Overconfidence is the tendency to put more weight on information that is consistent with the
initial beliefs or preferences.
10) In order to mitigate availability, the auditor should consult with others and make the
opposing case.
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 cycle approach is used because auditing standards require it.
D) All of the above are correct.
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 cycle approach is required by auditing standards.
D) The cycle approach allows the auditor to detect illegal acts.
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.
4) When using the cycle 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.
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” cycle may be audited at any time during the engagement
since it is unrelated to the other cycles.
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.
7) Which balance sheet accounts are included in the payroll and personnel cycle?
A) cash in bank, accrued payroll, trade accounts receivable
B) accrued payroll, notes payable, and deferred tax
C) accrued payroll, cash in bank, and accrued payroll taxes
D) salaries and commissions, cash in bank, accrued payroll taxes
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.
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
P = 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
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.
11) Under the cycle approach, the only accounts that have two or more cycles associated with
them are cash and accounts receivable.
12) Although auditors need to consider the interrelationships between cycles, they typically treat
cycles independently to the extent practical to manage complex audits effectively.
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.
6.7 Learning 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.
2) The term audit objective refers to all of the following except for
A) transaction-related audit objectives.
B) presentation and disclosure-related audit objectives.
C) balance-related audit objectives.
D) cycle-related audit objectives.
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.
4) It is generally impractical for the auditor to obtain complete assurance about the correctness of
each class of transactions.
6.8 Learning 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
2) If a 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.
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
4) Management assertions are
A) directly related to the financial reporting framework used by the company, usually U.S.
GAAP or IFRS.
B) stated in the footnotes to the financial statements.
C) explicitly expressed representations about the financial statements.
D) provided to the auditor in the assertions letter, but are not disclosed on the financial
statements.
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.
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
C) accuracy and valuation
D) rights and obligations
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
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
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
10) Briefly explain each management assertion related to classes of transactions and events for
the period under audit.
11) Briefly explain each management assertion related to account balances at period end.
12) Briefly explain each management assertion related to presentation and disclosure.
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.
14) The auditor’s audit objectives follow and are closely related to management assertions.
6.9 Learning Objective 6-9
1) Which of the following statements is true regarding the distinction 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.
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
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.
4) ________ deals with potential overstatement and ________ deals with understatements
(unrecorded transactions).
A) Occurrence; completeness
B) Completeness; occurrence
C) Accuracy; classification
D) Classification; accuracy
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.
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
objective, and (2) the management assertion being tested.
Audit Objectives
A. occurrence
B. completeness
C. accuracy
D. posting and summarization
E. classification
F. timing
Assertions
V. occurrence
W. completeness
X. accuracy
Y. classification
Z. cutoff
1. Vouch recorded sales from the sales journal to the file of bills of lading.
(1) ________
(2) ________
2. Compare dates on the bill of lading, sales invoices, and sales journal to test for delays in
recording sales transactions.
(1) ________
(2) ________
3. Account for the sequence of prenumbered bills of lading and sales invoices.
(1) ________
(2) ________
4. Trace from a sample of prelistings of cash receipts to the cash receipts journal, testing for
names, amounts, and dates.
(1) ________
(2) ________
5. Examine customer order forms for credit approval by the credit manager.
(1) ________
(2) ________