Chapter 6 Audit Responsibilities and Objectives

6.1 Learning Objective 6-1

1) The objective of an audit of the financial statements is an expression of an opinion on

1. A) the fairness of the financial statements in all material respects.

2. B) the accuracy of the financial statements.
3. C) the accuracy of the annual report.
4. D) the accuracy of the balance sheet and income statement.

Answer: A
2) If the auditor believes that the financial statements are not fairly stated or is unable to
reach a conclusion because of insufficient evidence, the auditor

1. A) should withdraw from the engagement.

2. B) should request an increase in audit fees so that more resources can be used to
conduct the audit.
3. C) has the responsibility of notifying financial statement users through the auditor’s
report.
4. D) should notify regulators of the circumstances.

Answer: C
3) Auditors accumulate evidence to

1. A) defend themselves in the event of a lawsuit.

2. B) determine if the financial statements are correct.
3. C) satisfy the requirements of the Securities Acts of 1933 and 1934.
4. D) reach a conclusion about the fairness of the financial statements.

Answer: D
4) Which of the following is not one of the steps used to develop audit objectives?

1. A) know the proper type of audit opinion to issue

2. B) divide the financial statements into cycles
3. C) know the management assertions about the financial statements
4. D) know the specific audit objectives for classes of transactions

Answer: A
6.2 Learning Objective 6-2
1) The responsibility for adopting sound accounting policies and maintaining adequate
internal control rests with the

1. A) board of directors.
2. B) company management.
3. C) financial statement auditor.
4. D) company’s internal audit department.

Answer: B
2) If management insists on financial statement disclosures that the auditor finds
unacceptable, the auditor can withdraw from the engagement or
1. A)
Issue a qualified opinion Issue an adverse opinion
Yes Yes

1. B)
Issue an adverse opinion Issue a qualified opinion
No No

1. C)
Issue an adverse opinion Issue a qualified opinion
Yes No

1. D)
Issue an adverse opinion Issue a qualified opinion
No Yes

Answer: A
3) In certifying their annual financial statements, the CEO and CFO of a public company
certify that the financial statements comply with the requirements of

1. A) GAAP.
2. B) the Sarbanes-Oxley Act.
3. C) the Securities Exchange Act of 1934.
4. D) GAAS.

Answer: C
4) Which of the following statements is true of a public company’s financial statements?

1. A) Sarbanes-Oxley requires only the CEO to certify the financial statements.

2. B) Sarbanes-Oxley requires only the CFO to certify the financial statements.
3. C) Sarbanes-Oxley requires both the CEO and CFO to certify the financial
statements.
4. D) Sarbanes-Oxley requires neither the CEO nor the CFO to certify the financial
statements.

Answer: C
5) The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to

1. A) the auditor.
2. B) management.
3. C) both management and the auditor equally.
4. D) management for the statements and the auditor for the notes.

Answer: B
6.3 Learning Objective 6-3

1) The auditor’s best defense when material misstatements are not uncovered is to have
conducted the audit

1. A) in accordance with generally accepted auditing standards.

2. B) as effectively as reasonably possible.
3. C) in a timely manner.
4. D) only after an adequate investigation of the management team.

Answer: A
2) Which of the following is not one of the reasons that auditors provide
only reasonable assurance on the financial statements?

1. A) The auditor commonly examines a sample, rather than the entire population of
transactions.
2. B) Accounting presentations contain complex estimates which involve uncertainty.
3. C) Fraudulently prepared financial statements are often difficult to detect.
4. D) Auditors believe that reasonable assurance is sufficient in the vast majority of
cases.

Answer: D
3) Which of the following statements is the most correct regarding errors and fraud?

1. A) An error is unintentional, whereas fraud is intentional.

2. B) Frauds occur more often than errors in financial statements.
3. C) Errors are always fraud and frauds are always errors.
4. D) Auditors have more responsibility for finding fraud than errors.

Answer: A
4) When an auditor believes that an illegal act may have occurred, the auditor should first

1. A) obtain an understanding of the nature and circumstances of the act.

2. B) consult with legal counsel or others knowledgeable about the illegal act.
3. C) discuss the matter with the audit committee.
4. D) withdraw from the engagement.

Answer: A
5) The auditor has no responsibility to plan and perform the audit to obtain reasonable
assurance that misstatements that are not ________ are detected.

1. A) important to the financial statements

2. B) statistically significant to the financial statements
3. C) material to the financial statements
4. D) identified by the client

Answer: C
6) Fraudulent financial reporting is most likely to be committed by whom?

1. A) line employees of the company

2. B) outside members of the company’s board of directors
3. C) company management
4. D) the company’s auditors

Answer: C
7) Which of the following would most likely be deemed a direct effect illegal act?

1. A) violation of federal employment laws

2. B) violation of federal environmental regulations
3. C) violation of federal income tax laws
4. D) violation of civil rights laws

Answer: C
8) The concept of reasonable assurance indicates that the auditor is

1. A) not a guarantor of the correctness of the financial statements.

2. B) not responsible for the fairness of the financial statements.
3. C) responsible only for issuing an opinion on the financial statements.
4. D) responsible for finding all misstatements.

Answer: A
9) Which of the following is the auditor least likely to do when aware of an illegal act?

1. A) discuss the matter with the client’s legal counsel

2. B) obtain evidence about the potential effect of the illegal act on the financial
statements
3. C) contact the local law enforcement officials regarding potential criminal
wrongdoing
4. D) consider the impact of the illegal act on the relationship with the company’s
management

Answer: C
10) An auditor discovers that the company’s bookkeeper unintentionally made an mistake
in calculating the amount of the quarterly sales. This is an example of

1. A) employee fraud.
2. B) an error.
3. C) misappropriation of assets.
4. D) a defalcation.

Answer: B
11) An auditor has a duty to

1. A) provide reasonable assurance that material misstatements will be detected.

2. B) be a guarantor of the fairness in the statements.
3. C) be equally responsible with management for the preparation of the financial
statements.
4. D) be an insurer of the fairness in the statements.

Answer: A
12) If the auditor were responsible for making certain that all of management’s assertions
in the financial statements were absolutely correct,

1. A) bankruptcies could no longer occur.

2. B) bankruptcies would be reduced to a very small number.
3. C) audits would be much easier to complete.
4. D) audits would not be economically practical.

Answer: D
13) When dealing with laws and regulations that do not have a direct effect on the
financial statements, the auditor

1. A) should inquire of management about whether the entity is in compliance with

such laws and regulations.
2. B) has no responsibility to determine if any violations of these laws has occurred.
3. C) must report all violations, including inconsequential violations, to the audit
committee.
4. D) should perform the same procedures as for violations having a direct effect on
the financial statements.

Answer: A
14) Which of the following statements is usually true?

1. A) Materiality is easy to quantify.

2. B) Fraudulent financial statements are often easy for the auditor to detect, especially
when there is collusion among management.
3. C) Reasonable assurance is a low level of assurance that the financial statements
are free from material misstatement.
4. D) An item is considered material if it would likely have changed or influenced the
decisions of a reasonable person using the statements.

Answer: D
15) Auditing standards make ________ distinction(s) between the auditor’s responsibilities
for searching for errors and fraud.

1. A) little
2. B) a significant
3. C) no
4. D) various

Answer: C
16) In comparing management fraud with employee fraud, the auditor’s risk of failing to
discover the fraud is

1. A) greater for management fraud because managers are inherently more deceptive
than employees.
2. B) greater for management fraud because of management’s ability to override
existing internal controls.
3. C) greater for employee fraud because of the higher crime rate among blue collar
workers.
4. D) greater for employee fraud because of the larger number of employees in the
organization.

Answer: B
17) Misappropriation of assets

1. A) is generally committed by company management.

2. B) harms the users of the financial statements by providing them incorrect financial
data for their decision making.
3. C) causes harm to stockholders because the assets are no longer available to their
rightful owners.
4. D) causes the financial statements to be misstated since the misappropriation
usually involves material amounts.

Answer: C
18) When comparing the auditor’s responsibility for detecting employee fraud and for
detecting errors, the profession has placed the responsibility

1. A) more on discovering errors than employee fraud.

2. B) more on discovering employee fraud than errors.
3. C) equally on discovering errors and employee fraud.
4. D) on the senior auditor for detecting errors and on the manager for detecting
employee fraud.

Answer: C
19) If there is collusion among management, the chance a normal audit would uncover
such acts is

1. A) very low.
2. B) very high.
3. C) zero.
4. D) none of the above.

Answer: A
20) When the auditor becomes aware of or suspects noncompliance with laws and
regulations

1. A) the auditor should evaluate the effects of the noncompliance on other aspects of
the audit.
2. B) the auditor should discuss the matter with management at a level above those
suspected of the noncompliance.
3. C) the auditor should obtain additional information to evaluate the possible effects
on the financial statements.
4. D) all of the above

Answer: D
21) When the auditor identifies or suspects noncompliance with laws and regulations, the
auditor

1. A) should discuss the matter with those whom they believe committed the illegal act.
2. B) begin communication with the FASB in accordance with PCAOB regulations.
3. C) may disclaim an opinion on the basis of scope limitations if he is precluded by
management from obtaining sufficient appropriate evidence.
4. D) should withdraw from the engagement.

Answer: C
22) When an auditor knows that an illegal act has occurred, she must

1. A) report it to the proper governmental authorities.

2. B) consider the effects on the financial statements, including the adequacy of
disclosure.
3. C) withdraw from the engagement.
4. D) issue an adverse opinion.

Answer: B
23) Which of the following is an accurate statement concerning the auditor’s responsibility
to consider laws and regulations?

1. A) Auditors can follow an easy, step-by-step procedure to determine how laws and
regulations impact the financial statements.
2. B) The auditor’s responsibility will depend on whether the laws or regulations are
expected to have a direct impact on the financial statements.
3. C) It is the responsibility of the auditor to determine if an act constitutes
noncompliance.
4. D) The auditor must inform an outside party if management has knowingly not
complied with a law or regulation.

Answer: B
24) Which of the following statements best describes the auditor’s responsibility with
respect to illegal acts that do not have a material effect on the client’s financial
statements?

1. A) Generally, the auditor is under no obligation to notify parties other than personnel
within the client’s organization.
2. B) Generally, the auditor is under an obligation to inform the PCAOB.
3. C) Generally, the auditor is obligated to disclose the relevant facts in the auditor’s
report.
4. D) Generally, the auditor is expected to compel the client to adhere to requirements
of the Foreign Corrupt Practices Act.

Answer: A
25) Which of the following statements best describes the auditor’s responsibility regarding
the detection of fraud?

1. A) The auditor is responsible for the failure to detect fraud only when such failure
clearly results from nonperformance of audit procedures specifically described in the
engagement letter.
2. B) The auditor is required to provide reasonable assurance that the financial
statements are free of both material errors and fraud.
3. C) The auditor is responsible for detecting material financial statement fraud, but not
a material misappropriation of assets.
4. D) The auditor is responsible for the failure to detect fraud only when an unqualified
opinion is issued.

Answer: B
26) When reporting identified or suspected noncompliance,

1. A) the auditor must report inconsequential noncompliance to the audit committee.

2. B) the auditor should communicate all material noncompliance matters to those
charged with governance.
3. C) any intentional noncompliance must be reported to local law enforcement.
4. D) all noncompliance, whether material or not, must result in a disclaimer of opinion.

Answer: B
27) Another term for misappropriation of assets is

1. A) management fraud.
2. B) collusion.
3. C) employee fraud.
4. D) illegal acts.

Answer: C
28) The provisions of many laws and regulations affect the financial statements

1. A) directly.
2. B) only indirectly.
3. C) both directly and indirectly.
4. D) materially if direct; immaterially if indirect.

Answer: B
29) If a client has violated federal tax laws,

1. A) the auditor must notify the IRS.

2. B) and the amount is significant, the auditor should communicate with those
charged with governance.
3. C) the noncompliance generally will not impact the financial statements.
4. D) the auditor does not need to evaluate the effects of the noncompliance on other
aspects of the audit.

Answer: B
detection does not change the auditor’s responsibility to properly plan and perform the
audit to detect material misstatements, whether caused by error or fraud.

The auditor’s responsibility for uncovering illegal acts that have a direct effect on the
financial statements is the same as for errors and fraud. However, the auditor is not
required to search for illegal acts that do not have a direct effect on the financial
statements unless there is reason to believe they exist.
Terms: Auditor responsibilities for discovering material errors, material fraud, direct-effect
illegal acts, and indirect-effect illegal acts
Diff: Challenging
Objective: LO 6-3
AACSB: Reflective thinking

34) Errors are usually more difficult for an auditor to detect than frauds.
Answer: FALSE
Terms: Auditor detection of errors and frauds
Diff: Easy
Objective: LO 6-3
AACSB: Reflective thinking
6.4 Learning Objective 6-4
1) An audit must be performed with an attitude of professional skepticism. Professional
skepticism consists of two primary components: a questioning mind and

1. A) the assumption that upper-level management is dishonest.

2. B) a critical assessment of the audit evidence.
3. C) the assumption that all employees are motivated by greed.
4. D) verification of all critical information by independent third parties.

Answer: B
2) Which of the following is an accurate statement about professional skepticism?

1. A) Professional skepticism involves a critical assessment of the evidence.

2. B) Professional skepticism is easy to implement in practice.
3. C) It is easy for auditors to understand that their clients may try to deceive them
throughout the audit process.
4. D) Professional skepticism is only necessary for the audits of public companies.

Answer: A
3) One of the characteristics of professional skepticism is ________, which is the
conviction to decide for oneself, rather than accepting the claims of others.

1. A) interpersonal understanding
2. B) autonomy
3. C) suspension of judgment
4. D) self-esteem

Answer: B
4) A questioning mindset

1. A) means the auditor must prove every statement that management makes to them.
2. B) means the auditor should approach the audit with a “do not trust anyone” mental
outlook.
3. C) assures that the auditor will only accept honest clients.
4. D) means the auditor should approach the audit with a “trust but verify” mental
outlook.

Answer: D
5) One of the characteristics of professional skepticism is_______, which is a desire to
investigate beyond the obvious.

1. A) self-esteem
2. B) an interpersonal understanding
3. C) a search for knowledge
4. D) a questioning mindset

Answer: C
6) ________ is the self-confidence to resist persuasion and to challenge assumptions or
conclusions.

1. A) Self-esteem
2. B) Interpersonal understanding
3. C) Suspension of judgment
4. D) Autonomy

Answer: A
7) An auditor should recognize that the application of auditing procedures may produce
evidence indicating the possibility of errors of fraud and therefore should

1. A) plan and perform the engagement with an attitude of professional skepticism.

2. B) not rely on internal controls that are designed to prevent or detect errors or fraud.
3. C) design audit tests to detect unrecorded transactions.
4. D) extend the work to audit the majority of the recorded transactions and records of
an entity.

Answer: A
6.5 Learning Objective 6-5
1) The starting point to effective professional judgment begins with

1. A) gathering the facts.

2. B) identifying alternatives.
3. C) identifying relevant literature.
4. D) identifying and defining the issue.

Answer: D
2) Which of the following is not a step in the professional judgment process?

1. A) make the decision

2. B) perform the analysis
3. C) determine the type of audit opinion
4. D) review and document the rationale for the conclusion

Answer: C
3) ________ is the tendency to make assessments by starting from an initial value and
then adjusting insufficiently away from that initial value.

1. A) Anchoring
2. B) Availability
3. C) Overconfidence
4. D) Confirmation

Answer: A
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?

1. A) identifying and defining the issue

2. B) performing the analysis and identifying potential alternatives
3. C) making the decision
4. D) gathering the facts

Answer: B
5) When performing the review and completing the documentation and rationale for the
conclusion step of the professional judgment process, auditors will

1. A) consider the accounting and auditing standards relevant to the issues.

2. B) articulate in written form the rationale of their judgment.
3. C) identify the issue.
4. D) gather the facts.

Answer: B
6.6 Learning Objective 6-6

1) Why does the auditor divide the financial statements into smaller segments?

1. A) Using the cycle approach makes the audit more manageable.

2. B) Most accounts have few relationships with others and so it is more efficient to
break the financial statements into smaller pieces.
3. C) The cycle approach is used because auditing standards require it.
4. D) All of the above are correct.

Answer: A
2) Why does the auditor divide the financial statements into segments around the financial
statement cycles?

1. A) Most auditors are trained to audit cycles as opposed to entire financial

statements.
2. B) The approach aids in the assignment of tasks to different members of the audit
team.
3. C) The cycle approach is required by auditing standards.
4. D) The cycle approach allows the auditor to detect illegal acts.

Answer: B
3) The most important general ledger account included in and affecting several cycles is
the

1. A) cash account.
2. B) inventory account.
3. C) income tax expense and liability accounts.
4. D) retained earnings account.

Answer: A
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

1. A) the transactions are related to financing a company rather than to its operations.
2. B) most capital acquisition and repayment cycle accounts involve few transactions,
but each is often highly material and therefore should be audited extensively.
3. C) Both A and B are correct.
4. D) Neither A nor B is correct.

Answer: C
5) In describing the cycle approach to segmenting an audit, which of the following
statements is not true?

1. A) All general ledger accounts and journals are included at least once.
2. B) Some journals and general ledger accounts are included in more than one cycle.
3. C) The “capital acquisition and repayment” cycle is closely related to the “acquisition
of goods and services and payment” cycle.
4. D) The “inventory and warehousing” cycle may be audited at any time during the
engagement since it is unrelated to the other cycles.

Answer: D
6) The cycle approach to auditing

1. A) ties to the way transactions are recorded in journals and then summarized in the
general ledger and financial statements.
2. B) cannot combine transactions recorded in different journals with the general
ledger balances that result from those transactions.
3. C) is the only way of segmenting an audit.
4. D) assumes that each account has two or more cycles associated with it.

Answer: A
7) Which balance sheet accounts are included in the payroll and personnel cycle?

1. A) cash in bank, accrued payroll, trade accounts receivable

2. B) accrued payroll, notes payable, and deferred tax
3. C) accrued payroll, cash in bank, and accrued payroll taxes
4. D) salaries and commissions, cash in bank, accrued payroll taxes

Answer: C
6.7 Learning Objective 6-7
1) Auditors have found that generally the most efficient and effective way to conduct
audits is to

1. A) obtain complete assurance about the correctness of each class of transactions

affecting the account.
2. B) obtain some combination of assurance for each class of transactions and for the
ending balance in the related accounts.
3. C) obtain assurance about the ending balance of the account only.
4. D) verify each entry that was made into an account.

Answer: B
2) The term audit objective refers to all of the following except for

1. A) transaction-related audit objectives.

2. B) presentation and disclosure-related audit objectives.
3. C) balance-related audit objectives.
4. D) cycle-related audit objectives.

Answer: D
6.8 Learning Objective 6-8
1) Which of the following is not one of the AICPA categories of assertions?

1. A) assertions about classes of transactions and events for the period under audit
2. B) assertions about financial statements and correspondence to GAAP
3. C) assertions about account balances at period end
4. D) assertions about presentation and disclosure

Answer: B
2) If a short-term note payable is included in the accounts payable balance on the financial
statement, there is a violation of the

1. A) completeness assertion.
2. B) existence assertion.
3. C) cutoff assertion.
4. D) classification assertion.

Answer: D
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?

1. A) assertions about classes of transactions for the period under audit

2. B) assertions about account balances at period end
3. C) assertions about the quality of source documents used to prepare the financial
statements
4. D) assertions about presentation and disclosure

Answer: C
4) Management assertions are

1. A) directly related to the financial reporting framework used by the company, usually
U.S. GAAP or IFRS.
2. B) stated in the footnotes to the financial statements.
3. C) explicitly expressed representations about the financial statements.
4. D) provided to the auditor in the assertions letter, but are not disclosed on the
financial statements.

Answer: A
5) Management makes the following assertions about account balances:

1. A) existence, completeness, classification and cutoff.

2. B) existence, accuracy, classification and rights and obligations.
3. C) existence, completeness, valuation and allocation, and rights and obligations.
4. D) existence, completeness, rights and obligations, and cutoff.

Answer: C
6) Management’s disclosure of the amount of unfunded pension obligations and the
assumptions underlying these amounts is an example of the ________ assertion.

1. A) completeness
2. B) existence
3. C) accuracy and valuation
4. D) rights and obligations

Answer: C
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”?

1. A) occurrence
2. B) completeness
3. C) rights and obligations
4. D) existence

Answer: B
8) Which of the following management assertions is not associated with classes of
transactions and events?

1. A) occurrence
2. B) classification
3. C) accuracy
4. D) rights and obligations

Answer: D
9) With increases in the complexity of transactions and the need for expanded disclosures
about these transactions, assertions about the ________ have increased in importance.

1. A) existence
2. B) account balances
3. C) presentation and disclosure
4. D) classes of transactions

Answer: C
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?

1. A) The specific audit objectives are applicable to every class of transactions.

2. B) The general audit objectives are applicable to every class of transactions.
3. C) Once the specific transaction-related audit objectives are established, they can
be used to develop the general transaction-related objectives.
4. D) For any given class of transactions, usually only one audit objective must be met
to conclude the transactions are properly recorded.

Answer: B
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?

1. A) existence
2. B) completeness
3. C) accuracy
4. D) cut-off

Answer: C
3) The posting and summarization audit objective is the auditor’s counterpart to
management’s assertion of

1. A) occurrence.
2. B) completeness.
3. C) accuracy.
4. D) classification.

Answer: C
4) ________ deals with potential overstatement and ________ deals with
understatements (unrecorded transactions).

1. A) Occurrence; completeness
2. B) Completeness; occurrence
3. C) Accuracy; classification
4. D) Classification; accuracy

Answer: A
6.10 Learning Objective 6-10
1) In testing for cutoff, the objective is to determine

1. A) whether all of the current period’s transactions are recorded.

2. B) whether transactions are recorded in the correct accounting period.
3. C) the proper cutoff between capitalizing and expensing expenditures.
4. D) the proper cutoff between disclosing items in footnotes or in account balances.

Answer: B
2) The detail tie-in objective is not concerned that the details in the account balance

1. A) agree with related subsidiary ledger amounts.

2. B) are properly disclosed in accordance with GAAP.
3. C) foot to the total in the account balance.
4. D) agree with the total in the general ledger.

Answer: B
3) The detail tie-in is part of the ________ assertion for account balances.

1. A) classification
2. B) valuation and allocation
3. C) rights and obligations
4. D) completeness

Answer: B
4) The classification balance-related audit objective

1. A) involves determining if items included on a client’s listing are included in the

correct general leger accounts.
2. B) is the counterpart to the management assertion of completeness.
3. C) involves determining if items included on a client’s listing are disclosed properly
in the financial statements.
4. D) involves tying in the account balances to the general ledger.

Answer: A
5) Balance-related audit objectives

1. A) are never applied to income statement accounts.

2. B) are designed to detect fraud.
3. C) provide a framework to help the auditor accumulate sufficient appropriate
evidence related to account balances.
4. D) can have only one specific-related audit objectives.

Answer: C
6) Which of the following statements is not true?

1. A) Balance-related audit objectives are applied to ending account balances.

2. B) Transaction-related audit objectives are applied to classes of transactions.
3. C) Balance-related audit objectives are applied to the ending balance in balance
sheet accounts.
4. D) Balance-related audit objectives are applied to both beginning and ending
balances in balance sheet accounts.

Answer: D
7) Determining that the footnote disclosures related to long-term debt are accurate is an
example of the ________ audit objective.

1. A) occurrence
2. B) completeness
3. C) presentation and disclosure
4. D) classification and understandability

Answer: C
6.11 Learning Objective 6-11
1) The procedures used to test the effectiveness of the internal controls are known as

1. A) tests of transactions.
2. B) tests of controls.
3. C) substantive analytical procedures.
4. D) control risk.

Answer: B
2) Which of the following statements is not correct?

1. A) There are many ways an auditor can accumulate evidence to meet overall audit
objectives.
2. B) Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility.
3. C) It is appropriate to minimize the cost of accumulating evidence.
4. D) Gathering evidence and minimizing costs are equally important considerations
that affect the approach the auditor selects.

Answer: D
3) Two overriding considerations affect the many ways an auditor can accumulate
evidence:

1. Sufficient appropriate evidence must be accumulated to meet the auditor’s

professional responsibility.
2. Cost of accumulating evidence should be minimized.

In evaluating these considerations

1. A) the first is more important than the second.

2. B) the second is more important than the first.
3. C) they are equally important.
4. D) it is impossible to prioritize them.

Answer: A
4) If the auditor has obtained a reasonable level of assurance about the fair presentation
of the financial statements through understanding internal control, assessing control risk,
testing controls, and analytical procedures, then the auditor

1. A) can issue an unqualified opinion.

2. B) can significantly reduce other substantive tests.
3. C) can write the engagement letter.
4. D) needs to perform additional tests of controls so that the assurance level can be
increased.

Answer: B
5) After the auditor has completed all audit procedures, it is necessary to combine the
information obtained to reach an overall conclusion as to whether the financial statements
are fairly presented. This is a highly subjective process that relies heavily on

1. A) generally accepted auditing standards.

2. B) the AICPA’s Code of Professional Conduct.
3. C) generally accepted accounting principles.
4. D) the auditor’s professional judgment.

Answer: D
6) Direct, written communication with the client’s customers to identify whether a
receivable exists is an example of a(n)

1. A) substantive test of transactions.

2. B) test of controls.
3. C) analytical procedure.
4. D) test of details of balances.

Answer: D
7) ________ are used as evidence to provide assurance about an account balance.

1. A) Substantive analytical procedures

2. B) Tests of transactions
3. C) Audit risks
4. D) Tests of details of balances

Answer: A
 (Arens/Elder/Beasley)
Chapter 7 Audit Evidence

7.1 Learning Objective 7-1

1) Which of the following is an accurate statement regarding audit evidence?

1. A) Responses to the auditor’s questions by client employees is considered highly

persuasive evidence.
2. B) Audit evidence should provide an absolute level of assurance.
3. C) The auditor uses evidence to determine whether the statements are fairly
presented.
4. D) All evidence must be highly persuasive.

Answer: C
7.2 Learning Objective 7-2
1) Auditors must make decisions regarding what evidence to gather and how much to
accumulate. Which of the following is a decision that must be made by auditors related to
evidence?
1. A)
Sample size Timing of audit procedures
Yes Yes

1. B)
Sample size Timing of audit procedures
No No

1. C)
Sample size Timing of audit procedures
Yes No

1. D)
Sample size Timing of audit procedures
No Yes

Answer: A
2) When can audit procedures be performed?
1. A)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes Yes

1. B)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No No

1. C)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
Yes No

1. D)
Prior to the fiscal year-end of the client Subsequent to the fiscal year-end of the client
No Yes

Answer: A
3) A(n) ________ is the detailed instruction that explains the audit evidence to be obtained
during the audit.

1. A) audit objective
2. B) audit procedure
3. C) audit assertion
4. D) audit program

Answer: B
4) Which of the following is not one of the four decisions about what evidence to gather
and how much of it to accumulate?

1. A) which audit procedures to use

2. B) which accounts must agree to the general ledger
3. C) when to perform the procedures
4. D) what sample size to select for a given procedure

Answer: B
5) When making audit evidence decisions,

1. A) the auditor decides which items in the population to test before determining the
sample size.
2. B) the sample size for any given procedure must remain constant from audit to
audit.
3. C) audit engagement software can assist the auditor in making evidence decisions.
4. D) the auditor is required to use the sample sizes that are determined by the
PCAOB.

Answer: C
7.3 Learning Objective 7-3
1) Audit evidence has two primary qualities for the auditor; relevance and reliability. Given
the choices below, which provides the auditor with the most reliable audit evidence?

1. A) general ledger account balances

2. B) confirmation of accounts receivable balance received from a customer
3. C) internal memo explaining the issuance of a credit memo
4. D) copy of month-end adjusting entries

Answer: B
2) Which of the following is not a characteristic of the reliability of evidence?

1. A) effectiveness of client internal controls

2. B) education of auditor
3. C) independence of information provider
4. D) timeliness

Answer: B
3) The auditor must gather sufficient and appropriate evidence during the course of the
audit. Sufficient evidence must

1. A) be well documented and cross-referenced in the audit documents.

2. B) be based on sources that are external to company.
3. C) provide evidence that prove or disprove an audit objective/assertion.
4. D) be persuasive enough to enable the auditor to issue an audit report.

Answer: D
4) Audit evidence obtained directly by the auditor will not be reliable if

1. A) the auditor lacks the competence to evaluate the evidence.

2. B) it is provided by the client’s attorney.
3. C) the client denies its veracity.
4. D) it is impossible for the auditor to obtain additional corroboratory evidence.

Answer: A
5) Appropriateness of evidence is a measure of the

1. A) quantity of evidence.
2. B) quality of evidence.
3. C) sufficiency of evidence.
4. D) meaning of evidence.

Answer: B
6) Which of the following statements regarding the relevance of evidence is correct?

1. A) To be relevant, evidence must pertain to the audit objective of the evidence.

2. B) To be relevant, evidence must be persuasive.
3. C) To be relevant, evidence must relate to multiple audit objectives.
4. D) To be relevant, evidence must be derived from a system including effective
internal controls.

Answer: A
7) Two determinants of the persuasiveness of evidence are

1. A) competence and sufficiency.

2. B) relevance and reliability.
3. C) appropriateness and sufficiency.
4. D) independence and effectiveness.

Answer: C
8) The two characteristics of the appropriateness of evidence are

1. A) relevance and timeliness.

2. B) relevance and accuracy.
3. C) relevance and reliability.
4. D) reliability and accuracy.

Answer: C
9) Which of the following forms of evidence would be least persuasive in forming the
auditor’s opinion about marketable securities and other investments held by the company?

1. A) responses to auditor’s questions by the president and controller regarding the

investments account
2. B) correspondence with a stockbroker regarding the quantity of client’s investments
held in street name by the broker
3. C) minutes of the board of directors authorizing the purchase of stock as an
investment
4. D) the auditor’s count of marketable securities

Answer: A
10) Which of the following statements is not correct?

1. A) It is possible to vary the sample size from one unit to 100% of the items in the
population.
2. B) Cost is an adequate justification for not gathering an adequate sample size.
3. C) The decision of how many items to test must be made by the auditor for each
audit procedure.
4. D) The sample size for any given procedure is likely to vary from audit to audit.

Answer: B
11) For audit evidence to be compelling to the auditor it must be sufficient and
appropriate. Which statement below is not correct regarding the appropriateness of audit
evidence?

1. A) The more effective the internal control system, the more assurance it provides
the auditor about the reliability of financial reporting by the client.
2. B) An auditor’s opinion, to be economically useful and profitable to the auditing firm
needs to be formed within a reasonable time and based on evidence obtained that
assures profits for the auditing firm.
3. C) Evidence obtained from independent sources outside the entity is generally more
reliable than evidence secured solely within the entity.
4. D) The independent auditor’s direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.

Answer: B
12) Which of the following is a correct statement regarding audit evidence?

1. A) A large sample of evidence provided by an independent party is always

considered persuasive evidence.
2. B) A small sample of only one or two pieces of highly appropriate evidence is
always considered persuasive evidence.
3. C) The auditor must obtain a sufficient amount of relevant and reliable evidence to
form an opinion on the fairness of the financial statements.
4. D) Evidence is usually more reliable for balance sheet accounts when it is obtained
within six months of the balance sheet date.

Answer: C
13) Which of the following is the most objective type of evidence?

1. A) a letter written by the client’s attorney discussing the likely outcome of

outstanding lawsuits
2. B) the physical count of securities and cash
3. C) inquiries of the credit manager about the collectability of noncurrent accounts
receivable
4. D) observation of cobwebs on some inventory bins

Answer: B
14) Which items affect the sufficiency of evidence when choosing a sample?
1. A)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes Yes

1. B)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No No

1. C)
Selecting items with a high likelihood of misstatement The randomness of the items selected
Yes No

1. D)
Selecting items with a high likelihood of misstatement The randomness of the items selected
No Yes

Answer: C
15) Determine which of the following is most correct statement regarding the reliability of
audit evidence.

1. A) Information that is indirectly obtained from external sources is the most reliable
audit evidence.
2. B) Reliability of audit evidence is dependent upon the evidence being subjective.
3. C) Reliability of evidence refers to the amount of evidence obtained.
4. D) If internal controls are effective, evidence obtained is more reliable than when the
controls are not effective.

Answer: D
16) Evidence is generally considered appropriate when

1. A) it has been obtained by random selection.

2. B) there is enough of it to afford a reasonable basis for an opinion on financial
statements.
3. C) it is relevant to the audit objective being tested.
4. D) it consists of written statements made by managers of the company under audit.

Answer: C
17) Given the economic and time constraints in which auditors can collect evidence
regarding management assertions about the financial statements, the auditor normally
gathers evidence that is

1. A) irrefutable.
2. B) conclusive.
3. C) persuasive.
4. D) completely convincing.

Answer: C
18) Which of the following statements is not a correct statement regarding audit
evidence?

1. A) Evidence obtained from an independent source outside the client organization is

more reliable than that obtained from within.
2. B) Documentary evidence is more reliable when it is received by the auditor
indirectly rather than directly.
3. C) Documents that originate outside the company are considered more reliable than
those that originate within the client’s organization.
4. D) External evidence, such as communications from banks, is generally regarded as
more reliable than answers obtained from inquiries of the client.

Answer: B
19) Evidence is usually more persuasive for balance sheet accounts when it is obtained

1. A) as close to the balance sheet date as possible.

2. B) only from transactions occurring on the balance sheet date.
3. C) from various times throughout the client’s year.
4. D) from the time period when transactions in that account were most numerous
during the fiscal period.

Answer: A
20) Which of the following statements is true?

1. A) Evidence must be relevant to all of the audit objectives.

2. B) If evidence is subjective, it cannot be reliable.
3. C) Evidence obtained directly by the auditor may not be reliable if the auditor lacks
the qualifications to evaluate the evidence.
4. D) The persuasiveness of evidence can be evaluated after considering its
sufficiency.

Answer: C
21) Which of the following statements relating to the competence of evidential matter is
always true?

1. A) Evidence from outside an enterprise is always reliable.

2. B) Accounting data developed under satisfactory conditions of internal control is not
reliable.
3. C) Oral representations made by management are not reliable evidence.
4. D) Evidence must be both reliable and relevant to be considered appropriate.

Answer: D