MET MG 712 Quiz 2

subject Type Homework Help
subject Pages 9
subject Words 1836
subject Authors Alvin A. Arens, Mark S. Beasley, Randal J. Elder

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1) Auditors should evaluate which of the following before evaluating application
controls because of the potential for pervasive effects.
A) input controls
B) control environment
C) processing controls
D) general controls
2) Whenever subsequent events are used to evaluate the amounts included in the
statements, care must be taken to distinguish between conditions that existed at the
balance sheet date and those that come into being after the end of the year. The
subsequent information should not be incorporated directly into the statements if the
conditions causing the change in valuation:
A) took place before year-end
B) did not take place until after year-end
C) occurred both before and after year-end
D) are reimbursable through insurance policies
3) Auditing standards require the auditor's assessment of going-concern issues.
A) True
B) False
4) Which of the following statements is correct regarding the capital acquisition and
payment cycle?
A) Bonds are frequently issued by companies in small amounts
B) There are relatively few transactions and each transaction is typically highly material
C) A primary emphasis in auditing debt is on existence
D) Audit procedures for Notes Payable and Interest Income are often performed
simultaneously
5) Subsequent events affecting the realization of assets ordinarily will require
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adjustments of the financial statements under examination because such events
typically represent the:
A) culmination of conditions that existed at the balance sheet date
B) discovery of new conditions occurring in the subsequent events period
C) final estimates of losses relating to casualties occurring in the subsequent events
period
D) preliminary estimate of losses relating to new events that occurred subsequent to the
balance sheet date
6) The auditor's consideration of a private company's internal control is:
A) required by GAAP
B) required by GAAS
C) required by the IRS
D) recommended by the SEC
7) The tests of details of balances procedure which requires the auditor to examine
notes paid after year-end to determine whether they were liabilities at the balance sheet
date is an attempt to satisfy the audit objective of:
A) existence
B) completeness
C) accuracy
D) classification
8) Which of the following statements is not a correct use of the terminology in relation
to audit evidence?
A) Evidence obtained from an independent source outside the client organization is
more reliable than that obtained from within
B) Documentary evidence is more reliable when it is received by the auditor indirectly
rather than directly
C) Documents that originate outside the company are considered more reliable than
those that originate within the client's organization
D) External evidence, such as communications from banks, is generally regarded as
more reliable than answers obtained from inquiries of the client
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9) An engagement letter can affect the CPA firm's legal responsibilities to the client, but
does not affect responsibility to external users of audited financial statements.
A) True
B) False
10) The
A) choose independently between alternate accounting principles and auditing
standards
B) distinguish between accounting practices that are acceptable and those that are not
C) be unyielding in all matters dealing with auditing procedures
D) maintain an impartial attitude on matters that come under the CPA's review
11) Changes of an accounting estimate requires the auditor to issue a modified
unqualified audit report with a consistency paragraph is inserted after the opinion
paragraph.
A) True
B) False
12) An auditor searching for related party transactions should obtain an understanding
of each subsidiary's relationship to the total entity because:
A) the business structure may be deliberately designed to obscure related party
transactions
B) this may reveal whether transactions would have taken place if the parties had been
unrelated
C) transactions may have been consummated on terms equivalent to arm's-length
transactions
D) this may permit the audit of intercompany account balances to be performed as of
concurrent dates
13) One disadvantage of using an imprest bank account is the increased time needed to
reconcile bank accounts.
A) True
B) False
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14) Which of the following statements is true concerning the allocation of preliminary
materiality?
A) It is necessary to allocate preliminary materiality to financial statements as a whole
rather than by segments
B) Preliminary materiality should be allocated to income statement accounts only
C) It is required by the SEC
D) When preliminary materiality is allocated to segments it is termed tolerable
misstatement
15) Most companies recognize sales revenue when:
A) sales are invoiced
B) goods are received by the customer
C) goods are shipped
D) Both B and C are correct, depending upon the company's revenue recognition
policies
16) An auditor is using audit sampling to test transactions in the acquisition and
payment cycle. She would normally set the tolerable exception rate at what level?
A) low
B) medium
C) high
D) indeterminate
17) The auditor has no responsibility to plan and perform the audit to obtain reasonable
assurance that misstatements, whether caused by errors or fraud, that are not ________
are detected.
A) important to the financial statements
B) statistically significant to the financial statements
C) material to the financial statements
D) identified by the client
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18) Tracing from source documents to the journal is useful for testing the existence
objective.
A) True
B) False
19) An auditor has the responsibility to actively search for subsequent events that occur
subsequent to the:
A) balance sheet date
B) date of the auditor's report
C) balance sheet date, but prior to the audit report
D) date of the management representation letter
20) At the completion of the audit, management is typically asked to make a written
statement as a part of the engagement letter that it is aware of no undisclosed contingent
liabilities.
A) True
B) False
21) As a CPA you have been asked to examine an entity's financial projections.
Acceptance of the engagement would be appropriate if distribution is limited to:
A) stockholders of record as of the date of the report
B) potential investors and creditors by posting on the Company's website
C) general public by posting on the company's website
D) a financial institution for which the company is negotiating a loan
22) Which of the following is not a general control?
A) computer performed validation tests of input accuracy
B) equipment failure causes error messages on monitor
C) separation of duties between programmer and operators
D) adequate program run instructions for operating the computer
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23) ARACR is normally lower for a public company audit than a private company
audit.
A) True
B) False
24) Inherent risk is ________ related to detection risk and ________ related to the
amount of audit evidence.
A) directly, inversely
B) directly, directly
C) inversely, inversely
D) inversely, directly
25) When the auditor has reason to believe an illegal act has occurred, the auditor
should:
A) inquire of management only at one level below those likely to be involved with the
illegality
B) begin communication with the FASB in accordance with PCAOB regulations
C) consider accumulating additional evidence to determine if there is actually an illegal
act
D) withdraw from the engagement
26) The date of the management representation letter received from the client should
coincide with which of the following?
A) date of latest subsequent event disclosed in the notes to the financial statements
B) date of the auditor's report
C) balance sheet date
D) engagement agreement
27) When using nonstatistical sampling, the sample must be a probabilistic one.
A) True
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B) False
28) The most important audit concern in the processing and recording cash receipts
function is not tracing the cash receipts from customers to their subsidiary ledger
accounts.
A) True
B) False
29) The audit procedure "examine duplicate copies of notes payable to determine
whether the notes payable were dated on or before the balance sheet date" is done for
which of the following balance-related audit objective?
A) completeness
B) cut-off
C) detail tie-in
D) existence
30) Auditors are ________ to document the known and likely misstatements in the
financial statements under audit.
A) permitted
B) required
C) not allowed
D) strongly encouraged
31) To test for recorded sales for which there were no actual shipments, the auditor
vouches from the:
A) bill of lading to the sales journal
B) sales journal to the shipping documents
C) sales journal to the accounts receivable subsidiary ledger
D) bill of lading to the supporting customer order and sales order
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32) Overstatement and understatement amounts are dealt with separately and then
combined when generalizing from the sample to the population when applying
monetary unit sampling (MUS).
A) True
B) False
33) The reliance the auditor places on substantive tests in relation to the reliance placed
on internal control varies in a relationship that is ordinarily:
A) parallel
B) inverse
C) direct
D) equal
34) To determine if significant internal control deficiencies are material weaknesses,
they must be evaluated on their:
A)
B)
C)
D)
35) Tests of details of balances must be designed for each balance-related audit
objective.
A) True
B) False
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36) What is an auditor's evaluation of a statistical sample for attributes when a test of
100 documents results in four exceptions if the tolerable exception rate is 5%, the
expected population exception rate is 3%, and the allowance for sampling risk is 2%?
A) Accept the sample results as support for planned reliance on the control because the
tolerable rate less the allowance for sampling risk equals the expected population
exception rate
B) Modify planned reliance on the control because the sample exception rate plus the
allowance for sampling risk exceeds the tolerable rate
C) Modify planned reliance on the control because the tolerable rate plus the allowance
for sampling risk exceeds the expected population exception rate
D) Accept the sample results as support for planned reliance on the control because the
sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate

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