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Auditing and Assurance Services in Australia Grant Gay 7e - Test Bank
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Auditing and Assurance Services in Australia Grant Gay 7e - Test Bank

Auditing and Assurance Services in Australia Grant Gay 7e - Test Bank   Instant Download - Complete Test Bank With Answers     Sample Questions Are Posted Below   Chapter 05 Testbank Student: ___________________________________________________________________________     1. Which of the following forms of advertising is permissible? A. Advertising that indicates the auditor's educational and professional …

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Auditing and Assurance Services in Australia Grant Gay 7e – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 05 Testbank

Student: ___________________________________________________________________________

 

 

1. Which of the following forms of advertising is permissible?

A. Advertising that indicates the auditor’s educational and professional attainments.

 

B. Advertising that offers discounted prices.

 

C. Advertising that explains deficiencies in competitors’ services.

 

D. All of the given answers are correct.

 

2. Before accepting an engagement to audit a new client, an auditor is required to:

A. make enquiries of the predecessor auditor after obtaining the consent of the prospective client.

 

B. obtain the prospective client’s signature on the engagement letter.

 

C. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.

 

D. discuss the management representation letter with the prospective client’s audit committee.

 

3. In assessing whether to accept a client for an audit engagement, an auditor should consider the:

A. entity’s business risk.

 

B. auditor’s engagement risk.

 

C. integrity of management.

 

D. All the given answers are correct.

 

4. Enquiry of the previous auditor is:

A. required about matters that have a bearing on acceptance of the client.

 

B. required after acceptance of a new client regarding matters the successor believes may affect the conduct of his or her audit.

 

C. helpful to the successor and may facilitate the successor’s audit, but is not required either before or after acceptance of the client.

 

D. required only if the change in auditors resulted from a disagreement between the client and previous auditors.

 

5. When an auditor is approached to perform an audit for the first time, the auditor should make enquiries of the previous auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining:

A. whether the predecessor’s work should be utilised.

 

B. whether the company follows the policy of rotating its auditors.

 

C.  whether the predecessor’s assessment of control risk has been high.

 

D. whether the engagement should be accepted.

 

6. Which of the following items should an auditor obtain from the previous auditor prior to accepting an audit engagement?

A. Analysis of statement of financial position accounts.

 

B. Analysis of income statement accounts.

 

C. All matters of continuing accounting significance.

 

D. Facts that might bear on the integrity of management.

 

7. Which of the following factors most likely would cause an auditor to not accept a new audit engagement?

A. An inadequate understanding of the entity’s internal control.

 

B. The close proximity to the end of the entity’s financial year.

 

C. The conclusion that the entity’s management probably lacks integrity.

 

D. An inability to perform preliminary analytical procedures before assessing control risk.

 

8. Engagement letters include all of the following except:

A. a list of additional services that will be provided.

 

B. a list of adjusting journal entries.

 

C. information about the audit fee.

 

D. arrangements involving the use of experts.

 

9. The scope and nature of an auditor’s contractual obligation to a client ordinarily is established in the:

A. engagement letter.

 

B. Corporations Act 2001.

 

C. management letter.

 

D. client’s constitution.

 

10. A prospective client’s refusal to give permission to communicate with the previous auditor and review certain portions of the previous auditor’s working papers will bear directly on the auditor’s decision concerning the:

A. ability to establish consistency in the application of accounting principles.

 

B. apparent scope limitation.

 

C. integrity of management.

 

D. adequacy of the planned audit program.

 

11. What is the responsibility of an auditor with respect to communicating with the previous auditor in connection with a prospective new audit client?

A. The auditor has no responsibility to contact the previous auditor.

 

B. The auditor should contact the previous auditor regardless of whether the prospective client authorises contact.

 

C. The auditor need not contact the previous auditor if the successor is aware of all available facts.

 

D. The auditor should obtain permission from the prospective client to contact the previous auditor.

 

12. Prior to the acceptance of an audit engagement with a client who has terminated the services of the previous auditor, the proposed auditor should:

A. contact the previous auditor without advising the prospective client and request a complete report of the circumstances leading to the termination with the understanding that all information disclosed will be kept confidential.

 

B. accept the engagement without contacting the previous auditor, since the proposed auditor can include audit procedures to verify the reason given by the client for the termination.

 

C. not communicate with the previous auditor, because this would in effect be asking the auditor to violate the confidential relationship between auditor and client.

 

D. advise the client of the intention to contact the previous auditor and request permission for the contact.

 

13. An audit firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include:

A. enquiry of management as to whether disagreements between the previous auditor and the prospective client were resolved satisfactorily.

 

B. confirmation of the prospective client’s bank accounts.

 

C. enquiry of third parties, such as the prospective client’s bankers and solicitors, about information regarding the prospective client and its management.

 

D. consideration of whether the internal control is sufficiently effective to permit a reduction in the extent of required substantive tests.

 

14. An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

A. illegal act affects the auditor’s ability to rely on management representations.

 

B. illegal act has material financial report implications.

 

C. illegal act has received widespread publicity.

 

D. auditor cannot reasonably estimate the effect of the illegal act on the financial report.

 

15. Audit planning:

A. is the same irrespective of the size or complexity of the entity.

 

B. requires confidentiality.

 

C. requires an understanding of the entity.

 

D. is necessary so that management can be advised of what the auditor intends to test.

 

16. Which of the following situations would most likely require special audit planning by the auditor?

A. Some items of factory and office equipment do not bear identification numbers.

 

B. Depreciation methods used for the client’s tax return differ from those used for the accounting records.

 

C. Assets costing less than $500 are expensed even though the expected life exceeds one year.

 

D. Inventory is comprised of precious gemstones.

 

17. Audit planning assists the auditor to:

A. identify and resolve potential problems on a timely basis.

 

B. devote appropriate attention to important areas of the audit.

 

C. perform the audit effectively and efficiently.

 

D. All of the given answers are correct.

 

18. Early appointment of the independent auditor will enable:

A. a more efficient audit to be planned.

 

B. a sufficient understanding of internal control to be obtained.

 

C. sufficient competent evidential matter to be obtained.

 

D. a more thorough audit to be performed.

 

19. An auditor obtains knowledge about a new client’s business and its industry in order to:

 

A.  make constructive suggestions concerning improvements to the client’s internal control.

 

B.  develop an attitude of professional scepticism concerning management’s financial report assertions.

 

C. evaluate whether the aggregation of known misstatements causes the financial report taken as a whole to be materially misstated.

 

D. understand the events and transactions that may have an effect on the client’s financial report.

 

20. An auditor searching for related-party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because:

 

A. intercompany transactions may have been consummated on terms equivalent to arm’s length transactions.

 

B. this might reveal whether particular transactions would have taken place if the parties had not been related.

 

C. the business structure may be deliberately designed to obscure related-party transactions.

 

D. this might permit the audit of intercompany account balances to be performed as of concurrent dates.

 

21. Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

A. Observe entity operations.

 

B. Re-perform entity processes.

 

C. Verify proper evaluation of inventory subject to technological obsolescence.

 

D. Review prior year’s audit documentation.

 

22. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

A. engage financial experts familiar with the nature of the business entity.

 

B. obtain knowledge of matters that relate to the nature of the entity’s business.

 

C. refer a substantial portion of the audit to another auditor, who will act as the principal auditor.

 

D. first inform management that an unmodified auditor’s opinion cannot be issued.

 

23. Which of the following actions is the most likely first step that an auditor will perform after accepting an initial audit engagement?

A. Prepare a rough draft of the financial report and the auditor’s report.

 

B. Assess control risk for the assertions embodied in the financial report.

 

C. Tour the client’s facilities and review the general records.

 

D. Consult with and review the work of the previous auditor prior to discussing the engagement with the client management.

 

24. Which of the following items is not an important consideration in an auditor’s evaluation of an entity’s business risk?

A. The specific business risks that an entity faces may result in financial report errors and fraud.

 

B. Business risk factors affect the ability of an entity to be profitable and survive.

 

C. Auditing standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements.

 

D. Auditing standards require the auditor to evaluate the entity’s business risk in order to provide suggestions to improve the entity’s profitability.

 

25. Business risk is the risk that:

A. an error will occur given the environmental characteristics of the account balance.

 

B. the auditor will give an inappropriate auditor’s opinion when the financial report is materially misstated.

 

C. the auditor will be exposed to loss to their professional practice from litigation or adverse publicity arising in connection with an audit.

 

D. the entity’s business objectives will not be attained due to the external and internal environment affecting the entity and the industry in which it operates.

 

26. An audit program should be designed for each individual audit and should include audit steps and procedures to:

 

A. ensure that only material items are audited.

 

B.  detect all fraud.

 

C.  identify all internal control weaknesses.

 

D.  ensure an efficient and effective audit.

 

27. Which of the following would be included in the audit strategy document?

A. The number of sales transactions to be tested.

 

B. The decision as to the combination of substantive testing and tests of control that would be adopted.

 

C. A flowchart of the entity’s internal control system.

 

D. The results of the interim testing of payroll.

 

28. An audit program should be designed specifically for each individual audit and should include audit procedures to:

A. ensure that only material items are audited.

 

B. provide assurances that the objectives of the audit are met.

 

C. increase the amount of management information available.

 

D. detect and eliminate all fraud.

 

29. In designing audit programs, an auditor should establish specific audit objectives that relate primarily to the:

A. timing of audit procedures.

 

B. selected audit techniques.

 

C. financial report assertions.

 

D. cost–benefit of gathering evidence.

 

30. Time budgets on audit engagements are not used for which of the following reasons?

A. To monitor actual audit hours worked by staff on an engagement.

 

B. To ensure that adequate time is allocated to significant areas of the audit.

 

C. To estimate an appropriate fee for the engagement.

 

D. To ensure that audit staff working on the engagement are paid the correct amount.

 

31. Time budgets are used:

A. to estimate the costs and fee for the engagement.

 

B. to monitor actual audit hours incurred.

 

C. to assist in the staff scheduling process.

 

D. All the given answers are correct

 

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

A. Study of relationships of the financial information with relevant non-financial information.

 

B. Comparison of the financial information with similar information regarding the industry in which the entity operates.

 

C. Comparison of recorded amounts of major disbursements with appropriate invoices.

 

D. Comparison of the financial information with budgeted amounts.

 

33. Analytical procedures may be classified as being primarily:

A. tests of control.

 

B. detailed tests of balances.

 

C. tests of ratios.

 

D. substantive tests.

 

34. Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

A. Relationships involving statement of financial position accounts.

 

B. Transactions subject to management discretion.

 

C. Relationships involving income statement accounts.

 

D. Data subject to audit testing in the prior year.

 

35. Analytical procedures that are required in all audits of financial reports are analytical procedures:

A. relevant to achieving important audit objectives related to particular assertions.

 

B. expected to be efficient and effective in the circumstances.

 

C. based on available and reliable financial data.

 

D. used in the planning and overall review stages.

 

36. In applying analytical procedures, the identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared to expectations, requires:

A. judgment by the auditor.

 

B. participation by senior audit team members.

 

C. understanding of complex models.

 

D. advanced training in plausibility formulation.

 

37. Which of the following is not a benefit of analytical procedures?

A. Assists in understanding a client’s business and identifying areas of potential risk.

 

B. Enables the auditor to review the financial and non-financial information of a client.

 

C. May reduce the level of detailed audit testing if the control system surrounding the reliability of the information is strong.

 

D. Provides adjustments to error levels during tests of control.

 

38. One reason why the independent auditor performs analytical procedures of the client’s operations is to identify:

A. deficiencies of a material nature in the internal control.

 

B. unusual transactions.

 

C. non-compliance with prescribed control procedures.

 

D. improper separation of accounting and other financial duties.

 

39. The auditor is most likely to rely on analytical procedures alone if a balance is:

A. material and internal controls are good.

 

B. immaterial and internal controls are poor.

 

C. immaterial and inherent risk is high.

 

D. immaterial and internal controls are good.

 

40. Analytical procedures used in planning an audit should focus on identifying:

A. the predictability of financial data from individual transactions.

 

B. the various assertions that are embodied in the financial report.

 

C. areas that may represent specific risk relevant to the audit.

 

D. material weaknesses in internal control.

 

41. Analytical procedures are:

A. never required.

 

B. required for planning, substantive testing and overall review of the financial report.

 

C. required for planning and overall review of the financial report.

 

D. required during planning only.

 

42. The auditor generally gives most emphasis to ratio and trend analysis in the examination of:

A. retained profits.

 

B. income statement items.

 

C. statement of financial position items.

 

D. cash flows.

 

43. An example of an analytical procedure is the comparison of:

A. recorded amounts of major disbursements with appropriate invoices.

 

B. results of a statistical sample with the expected characteristics of the actual population.

 

C. computer-generated data with similar data generated by a manual accounting system.

 

D. financial information with similar information regarding the industry in which the entity operates.

 

44. Significant unexpected differences identified by analytical procedures will usually necessitate:

A. a review of internal control.

 

B. an explanation in the representation letter.

 

C. investigation by the auditor.

 

D. addition of an Emphasis of Matter paragraph to the auditor’s report.

 

45. Which of the following is a nonfinancial performance measure?

A. Warranty rates.

 

B. Return on investment.

 

C. Net profit.

 

D. Sales.

 

46. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of:

A. tests of transactions and balances.

 

B. a preliminary review of internal accounting control.

 

C. specialised audit programs.

 

D. analytical procedures.

 

47. The auditor notices significant fluctuations in key elements of the company’s financial report. If management is unable to provide an acceptable explanation, the auditor should:

A. consider the matter a scope limitation.

 

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

 

C. intensify the examination with the expectation of detecting management fraud.

 

D. withdraw from the engagement.

 

48. An auditor would place most reliance on the results of analytical procedures when there is:

A. material balance, low inherent risk, low control risk.

 

B. immaterial balance, high inherent risk, high control risk.

 

C. material balance, low inherent risk, high control risk.

 

D. immaterial balance, low inherent risk, low control risk.

 

49. An auditor compares this year’s revenues and expenses with those of the previous year and investigates all changes exceeding 10%. By carrying out this procedure the auditor would be most likely to learn that:

A. an increase in property tax rates has not been recognised in the client’s accrual.

 

B. the provision for uncollectible accounts is inadequate because of worsening economic conditions.

 

C. fourth-quarter payroll taxes were not paid.

 

D. the client changed its capitalisation policy for small non-current assets.

 

50. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

A. Unrecorded sales.

 

B. Merchandise purchases charged to selling and general expense.

 

C. Fictitious sales.

 

D. Unrecorded purchases.

 

 

 

Chapter 05 Testbank Key

1. Which of the following forms of advertising is permissible?

A. Advertising that indicates the auditor’s educational and professional attainments.

 

B. Advertising that offers discounted prices.

 

C. Advertising that explains deficiencies in competitors’ services.

 

D. All of the given answers are correct.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

2. Before accepting an engagement to audit a new client, an auditor is required to:

A. make enquiries of the predecessor auditor after obtaining the consent of the prospective client.

 

B. obtain the prospective client’s signature on the engagement letter.

 

C. prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.

 

D. discuss the management representation letter with the prospective client’s audit committee.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

3. In assessing whether to accept a client for an audit engagement, an auditor should consider the:

A. entity’s business risk.

 

B. auditor’s engagement risk.

 

C. integrity of management.

 

D. All the given answers are correct.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

4. Enquiry of the previous auditor is:

A. required about matters that have a bearing on acceptance of the client.

 

B. required after acceptance of a new client regarding matters the successor believes may affect the conduct of his or her audit.

 

C. helpful to the successor and may facilitate the successor’s audit, but is not required either before or after acceptance of the client.

 

D. required only if the change in auditors resulted from a disagreement between the client and previous auditors.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

5. When an auditor is approached to perform an audit for the first time, the auditor should make enquiries of the previous auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining:

A. whether the predecessor’s work should be utilised.

 

B. whether the company follows the policy of rotating its auditors.

 

C.  whether the predecessor’s assessment of control risk has been high.

 

D. whether the engagement should be accepted.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

6. Which of the following items should an auditor obtain from the previous auditor prior to accepting an audit engagement?

A. Analysis of statement of financial position accounts.

 

B. Analysis of income statement accounts.

 

C. All matters of continuing accounting significance.

 

D. Facts that might bear on the integrity of management.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

7. Which of the following factors most likely would cause an auditor to not accept a new audit engagement?

A. An inadequate understanding of the entity’s internal control.

 

B. The close proximity to the end of the entity’s financial year.

 

C. The conclusion that the entity’s management probably lacks integrity.

 

D. An inability to perform preliminary analytical procedures before assessing control risk.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

8. Engagement letters include all of the following except:

A. a list of additional services that will be provided.

 

B. a list of adjusting journal entries.

 

C. information about the audit fee.

 

D. arrangements involving the use of experts.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

9. The scope and nature of an auditor’s contractual obligation to a client ordinarily is established in the:

A. engagement letter.

 

B. Corporations Act 2001.

 

C. management letter.

 

D. client’s constitution.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

 

 

10. A prospective client’s refusal to give permission to communicate with the previous auditor and review certain portions of the previous auditor’s working papers will bear directly on the auditor’s decision concerning the:

A. ability to establish consistency in the application of accounting principles.

 

B. apparent scope limitation.

 

C. integrity of management.

 

D. adequacy of the planned audit program.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

11. What is the responsibility of an auditor with respect to communicating with the previous auditor in connection with a prospective new audit client?

A. The auditor has no responsibility to contact the previous auditor.

 

B. The auditor should contact the previous auditor regardless of whether the prospective client authorises contact.

 

C. The auditor need not contact the previous auditor if the successor is aware of all available facts.

 

D. The auditor should obtain permission from the prospective client to contact the previous auditor.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

12. Prior to the acceptance of an audit engagement with a client who has terminated the services of the previous auditor, the proposed auditor should:

A. contact the previous auditor without advising the prospective client and request a complete report of the circumstances leading to the termination with the understanding that all information disclosed will be kept confidential.

 

B. accept the engagement without contacting the previous auditor, since the proposed auditor can include audit procedures to verify the reason given by the client for the termination.

 

C. not communicate with the previous auditor, because this would in effect be asking the auditor to violate the confidential relationship between auditor and client.

 

D. advise the client of the intention to contact the previous auditor and request permission for the contact.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

13. An audit firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include:

A. enquiry of management as to whether disagreements between the previous auditor and the prospective client were resolved satisfactorily.

 

B. confirmation of the prospective client’s bank accounts.

 

C. enquiry of third parties, such as the prospective client’s bankers and solicitors, about information regarding the prospective client and its management.

 

D. consideration of whether the internal control is sufficiently effective to permit a reduction in the extent of required substantive tests.

 

AACSB: Analytic
Difficulty: Hard
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

14. An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the:

A. illegal act affects the auditor’s ability to rely on management representations.

 

B. illegal act has material financial report implications.

 

C. illegal act has received widespread publicity.

 

D. auditor cannot reasonably estimate the effect of the illegal act on the financial report.

 

AACSB: Analytic
Difficulty: Hard
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter.
Topic: Client acceptance and continuance

 

15. Audit planning:

A. is the same irrespective of the size or complexity of the entity.

 

B. requires confidentiality.

 

C. requires an understanding of the entity.

 

D. is necessary so that management can be advised of what the auditor intends to test.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.02 Explain the importance of planning to the audit process.
Topic: Audit planning

 

16. Which of the following situations would most likely require special audit planning by the auditor?

A. Some items of factory and office equipment do not bear identification numbers.

 

B. Depreciation methods used for the client’s tax return differ from those used for the accounting records.

 

C. Assets costing less than $500 are expensed even though the expected life exceeds one year.

 

D. Inventory is comprised of precious gemstones.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.02 Explain the importance of planning to the audit process.
Topic: Audit planning

 

17. Audit planning assists the auditor to:

A. identify and resolve potential problems on a timely basis.

 

B. devote appropriate attention to important areas of the audit.

 

C. perform the audit effectively and efficiently.

 

D. All of the given answers are correct.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.02 Explain the importance of planning to the audit process.
Topic: Audit planning

 

18. Early appointment of the independent auditor will enable:

A. a more efficient audit to be planned.

 

B. a sufficient understanding of internal control to be obtained.

 

C. sufficient competent evidential matter to be obtained.

 

D. a more thorough audit to be performed.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.02 Explain the importance of planning to the audit process.
Topic: Audit planning

 

19. An auditor obtains knowledge about a new client’s business and its industry in order to:

 

A.  make constructive suggestions concerning improvements to the client’s internal control.

 

B.  develop an attitude of professional scepticism concerning management’s financial report assertions.

 

C. evaluate whether the aggregation of known misstatements causes the financial report taken as a whole to be materially misstated.

 

D. understand the events and transactions that may have an effect on the client’s financial report.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.03 Identify the important aspects of the auditor’s understanding of an entity and its environment.
Topic: Understanding the entity and its environment

 

20. An auditor searching for related-party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because:

 

A. intercompany transactions may have been consummated on terms equivalent to arm’s length transactions.

 

B. this might reveal whether particular transactions would have taken place if the parties had not been related.

 

C. the business structure may be deliberately designed to obscure related-party transactions.

 

D. this might permit the audit of intercompany account balances to be performed as of concurrent dates.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.03 Identify the important aspects of the auditor’s understanding of an entity and its environment.
Topic: Understanding the entity and its environment

 

21. Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

A. Observe entity operations.

 

B. Re-perform entity processes.

 

C. Verify proper evaluation of inventory subject to technological obsolescence.

 

D. Review prior year’s audit documentation.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.03 Identify the important aspects of the auditor’s understanding of an entity and its environment.
Topic: Understanding the entity and its environment

 

22. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

A. engage financial experts familiar with the nature of the business entity.

 

B. obtain knowledge of matters that relate to the nature of the entity’s business.

 

C. refer a substantial portion of the audit to another auditor, who will act as the principal auditor.

 

D. first inform management that an unmodified auditor’s opinion cannot be issued.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.03 Identify the important aspects of the auditor’s understanding of an entity and its environment.
Topic: Understanding the entity and its environment

 

 

 

23. Which of the following actions is the most likely first step that an auditor will perform after accepting an initial audit engagement?

A. Prepare a rough draft of the financial report and the auditor’s report.

 

B. Assess control risk for the assertions embodied in the financial report.

 

C. Tour the client’s facilities and review the general records.

 

D. Consult with and review the work of the previous auditor prior to discussing the engagement with the client management.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.03 Identify the important aspects of the auditor’s understanding of an entity and its environment.
Topic: Understanding the entity and its environment

 

24. Which of the following items is not an important consideration in an auditor’s evaluation of an entity’s business risk?

A. The specific business risks that an entity faces may result in financial report errors and fraud.

 

B. Business risk factors affect the ability of an entity to be profitable and survive.

 

C. Auditing standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements.

 

D. Auditing standards require the auditor to evaluate the entity’s business risk in order to provide suggestions to improve the entity’s profitability.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.04 Assess entity business risk.
Topic: Business risk

 

25. Business risk is the risk that:

A. an error will occur given the environmental characteristics of the account balance.

 

B. the auditor will give an inappropriate auditor’s opinion when the financial report is materially misstated.

 

C. the auditor will be exposed to loss to their professional practice from litigation or adverse publicity arising in connection with an audit.

 

D. the entity’s business objectives will not be attained due to the external and internal environment affecting the entity and the industry in which it operates.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.04 Assess entity business risk.
Topic: Business risk

 

26. An audit program should be designed for each individual audit and should include audit steps and procedures to:

 

A. ensure that only material items are audited.

 

B.  detect all fraud.

 

C.  identify all internal control weaknesses.

 

D.  ensure an efficient and effective audit.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.05 Explain how an auditor develops an overall audit strategy and prepares a detailed audit plan or audit program.
Topic: Developing an overall audit strategy

 

27. Which of the following would be included in the audit strategy document?

A. The number of sales transactions to be tested.

 

B. The decision as to the combination of substantive testing and tests of control that would be adopted.

 

C. A flowchart of the entity’s internal control system.

 

D. The results of the interim testing of payroll.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.05 Explain how an auditor develops an overall audit strategy and prepares a detailed audit plan or audit program.
Topic: Developing an overall audit strategy

 

28. An audit program should be designed specifically for each individual audit and should include audit procedures to:

A. ensure that only material items are audited.

 

B. provide assurances that the objectives of the audit are met.

 

C. increase the amount of management information available.

 

D. detect and eliminate all fraud.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.05 Explain how an auditor develops an overall audit strategy and prepares a detailed audit plan or audit program.
Topic: Developing an overall audit strategy

 

29. In designing audit programs, an auditor should establish specific audit objectives that relate primarily to the:

A. timing of audit procedures.

 

B. selected audit techniques.

 

C. financial report assertions.

 

D. cost–benefit of gathering evidence.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.05 Explain how an auditor develops an overall audit strategy and prepares a detailed audit plan or audit program.
Topic: Developing an overall audit strategy

 

30. Time budgets on audit engagements are not used for which of the following reasons?

A. To monitor actual audit hours worked by staff on an engagement.

 

B. To ensure that adequate time is allocated to significant areas of the audit.

 

C. To estimate an appropriate fee for the engagement.

 

D. To ensure that audit staff working on the engagement are paid the correct amount.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.06 Describe the process of assigning and scheduling audit staff.
Topic: Assigning and scheduling audit staff

 

31. Time budgets are used:

A. to estimate the costs and fee for the engagement.

 

B. to monitor actual audit hours incurred.

 

C. to assist in the staff scheduling process.

 

D. All the given answers are correct

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.06 Describe the process of assigning and scheduling audit staff.
Topic: Assigning and scheduling audit staff

 

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

A. Study of relationships of the financial information with relevant non-financial information.

 

B. Comparison of the financial information with similar information regarding the industry in which the entity operates.

 

C. Comparison of recorded amounts of major disbursements with appropriate invoices.

 

D. Comparison of the financial information with budgeted amounts.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

33. Analytical procedures may be classified as being primarily:

A. tests of control.

 

B. detailed tests of balances.

 

C. tests of ratios.

 

D. substantive tests.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

34. Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

A. Relationships involving statement of financial position accounts.

 

B. Transactions subject to management discretion.

 

C. Relationships involving income statement accounts.

 

D. Data subject to audit testing in the prior year.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

35. Analytical procedures that are required in all audits of financial reports are analytical procedures:

A. relevant to achieving important audit objectives related to particular assertions.

 

B. expected to be efficient and effective in the circumstances.

 

C. based on available and reliable financial data.

 

D. used in the planning and overall review stages.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

36. In applying analytical procedures, the identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared to expectations, requires:

A. judgment by the auditor.

 

B. participation by senior audit team members.

 

C. understanding of complex models.

 

D. advanced training in plausibility formulation.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

 

 

37. Which of the following is not a benefit of analytical procedures?

A. Assists in understanding a client’s business and identifying areas of potential risk.

 

B. Enables the auditor to review the financial and non-financial information of a client.

 

C. May reduce the level of detailed audit testing if the control system surrounding the reliability of the information is strong.

 

D. Provides adjustments to error levels during tests of control.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

38. One reason why the independent auditor performs analytical procedures of the client’s operations is to identify:

A. deficiencies of a material nature in the internal control.

 

B. unusual transactions.

 

C. non-compliance with prescribed control procedures.

 

D. improper separation of accounting and other financial duties.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

39. The auditor is most likely to rely on analytical procedures alone if a balance is:

A. material and internal controls are good.

 

B. immaterial and internal controls are poor.

 

C. immaterial and inherent risk is high.

 

D. immaterial and internal controls are good.

 

AACSB: Analytic
Difficulty: Easy
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

 

 

40. Analytical procedures used in planning an audit should focus on identifying:

A. the predictability of financial data from individual transactions.

 

B. the various assertions that are embodied in the financial report.

 

C. areas that may represent specific risk relevant to the audit.

 

D. material weaknesses in internal control.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

41. Analytical procedures are:

A. never required.

 

B. required for planning, substantive testing and overall review of the financial report.

 

C. required for planning and overall review of the financial report.

 

D. required during planning only.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

42. The auditor generally gives most emphasis to ratio and trend analysis in the examination of:

A. retained profits.

 

B. income statement items.

 

C. statement of financial position items.

 

D. cash flows.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

 

 

43. An example of an analytical procedure is the comparison of:

A. recorded amounts of major disbursements with appropriate invoices.

 

B. results of a statistical sample with the expected characteristics of the actual population.

 

C. computer-generated data with similar data generated by a manual accounting system.

 

D. financial information with similar information regarding the industry in which the entity operates.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

44. Significant unexpected differences identified by analytical procedures will usually necessitate:

A. a review of internal control.

 

B. an explanation in the representation letter.

 

C. investigation by the auditor.

 

D. addition of an Emphasis of Matter paragraph to the auditor’s report.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

45. Which of the following is a nonfinancial performance measure?

A. Warranty rates.

 

B. Return on investment.

 

C. Net profit.

 

D. Sales.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

 

 

46. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of:

A. tests of transactions and balances.

 

B. a preliminary review of internal accounting control.

 

C. specialised audit programs.

 

D. analytical procedures.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

47. The auditor notices significant fluctuations in key elements of the company’s financial report. If management is unable to provide an acceptable explanation, the auditor should:

A. consider the matter a scope limitation.

 

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

 

C. intensify the examination with the expectation of detecting management fraud.

 

D. withdraw from the engagement.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

48. An auditor would place most reliance on the results of analytical procedures when there is:

A. material balance, low inherent risk, low control risk.

 

B. immaterial balance, high inherent risk, high control risk.

 

C. material balance, low inherent risk, high control risk.

 

D. immaterial balance, low inherent risk, low control risk.

 

AACSB: Analytic
Difficulty: Medium
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

 

 

49. An auditor compares this year’s revenues and expenses with those of the previous year and investigates all changes exceeding 10%. By carrying out this procedure the auditor would be most likely to learn that:

A. an increase in property tax rates has not been recognised in the client’s accrual.

 

B. the provision for uncollectible accounts is inadequate because of worsening economic conditions.

 

C. fourth-quarter payroll taxes were not paid.

 

D. the client changed its capitalisation policy for small non-current assets.

 

AACSB: Analytic
Difficulty: Hard
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

50. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

A. Unrecorded sales.

 

B. Merchandise purchases charged to selling and general expense.

 

C. Fictitious sales.

 

D. Unrecorded purchases.

 

AACSB: Analytic
Difficulty: Hard
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk.
Topic: Analytical procedures

 

 

 

Chapter 05 Testbank Summary

Category # of Questions
AACSB: Analytic 50
Difficulty: Easy 22
Difficulty: Hard 4
Difficulty: Medium 24
Learning Objective: 05.01 Explain why the decision to accept a client is important, and describe the primary features of client acceptance and continuance, including the purpose and content of an audit engagement letter. 14
Learning Objective: 05.02 Explain the importance of planning to the audit process. 4
Learning Objective: 05.03 Identify the important aspects of the auditor’s understanding of an entity and its environment. 5
Learning Objective: 05.04 Assess entity business risk. 2
Learning Objective: 05.05 Explain how an auditor develops an overall audit strategy and prepares a detailed audit plan or audit program. 4
Learning Objective: 05.06 Describe the process of assigning and scheduling audit staff. 2
Learning Objective: 05.07 Outline the types and uses of analytical procedures and distinguish those that are useful in obtaining an understanding of an entity and assessing business risk. 19
Topic: Analytical procedures 19
Topic: Assigning and scheduling audit staff 2
Topic: Audit planning 4
Topic: Business risk 2
Topic: Client acceptance and continuance 14
Topic: Developing an overall audit strategy 4
Topic: Understanding the entity and its environment 5

 

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