Chapter 6 Quiz

18. [LO1] Planning is a continuous process that must occur throughout the audit engagement
because
(a) disconfirming information is likely to arise.
(b) the audit committee is likely to point out flaws in the original audit plan.
(c) all information affecting the audit occurs concurrently.
(d) auditor skill levels are continuously fluctuating. A

19. [LO1] Development of the audit strategy includes all of the following activities except
(a) specifying the work that has to be performed.
(b) specifying the timing of the work to be performed.
(c) documenting an audit planning memorandum.
(d) defining initial estimates of audit risk and materiality. C

20. Risk assessment points the auditor to the important areas of the client's operations and
financial statements in order to
(a) understand important areas of the client's operations and financial statements.
(b) identify potential problems.
(c) determine what needs to be accomplished during the audit.
(d) all of the above D

21. [LO1,2] Which of the following is not a consideration for an auditor while "scaling" the
audit?
(a) The client company has multiple locations throughout the region.
(b) Another firm is responsible for auditing one of the client's out-of-town subsidiaries.
(c) An outside service provider prepares all of the client company's payroll accounting
records.
(d) The client company plans to hire and develop employees so that it can prepare its payroll
accounting records in-house within the next two years. D

22. [LO2] An experienced audit team will begin planning the audit before it knows all the
specific information about a particular client company because
(a) experienced auditors know the general framework of what needs to be done on any audit.
(b) auditors experienced in the client's industry understand the activities and risks of the
industry, which gives them an understanding of the important financial statement accounts
and ICFR areas.
(c) auditors experienced with this client company have already gained quite a bit of
information from the client acceptance or continuance processes.
(d) all of the above D

23. [LO2] Scaling the audit refers to

(a) weighing the risks associated with the client's susceptibility to fraud.
(b) preparing evidence for an outside service provider.
(c) fitting the audit work to the specific characteristics of the client.
(d) delivering products or services as contracted in the engagement letter. C

24. [LO2] Deliverables refers to the

(a) timing of the auditor's acceptance of the client company.
(b) products and services as contracted in the engagement letter.
(c) degree of correlation between the audit work to the specific characteristics of the client.
(d) auditor's experience in the client's industry. B

25. [LO2] The scope of the engagement depends upon all of the following considerations
except the
(a) presentation of the client's accounting information.
(b) use and importance of IT to the client's activities and ICFR.
(c) ability to use audit evidence performed by the client's internal auditors.
(d) timing of the client's fiscal year-end. D

26. [LO2] The scope of an audit team's work will be more extensive
(a) for a first year audit engagement as opposed to a continuing audit.
(b) when internal auditors perform work to be used as evidence by the external auditors.
(c) when a user company's auditor relies upon a report provided by an auditor of the service
provider.
(d) for a company with effective entity-level controls. A

27. [LO3] An internal control that is ineffective to the extent that it might not prevent the
financial statements from being materially misstated is referred to as a
(a) significant risk
(b) substantive error
(c) material weakness
(d) tolerable misstatement C

28. [LO3] Which of the following would not be an appropriate benchmark to use in setting
financial statement-level materiality?
(a) a percentage of total revenue
(b) a percentage of total assets
(c) a percentage of current liabilities
(d) a percentage of profit from continuing operations C

29. [LO3] The materiality threshold for each account balance or class of transactions is called
(a) tolerable misstatement
(b) material assertion
(c) substantive rule of thumb
(d) account deficiency A

30. [LO3] For purposes of an integrated audit, materiality is assessed within the context of
users who have
(a) appropriate knowledge of business and economic activities
(b) an understanding that financial statements are prepared and audited to levels of materiality
(c) the ability to make appropriate economic decisions on the basis of information in the
financial statements
(d) all of the above D

31. [LO4] Which of the following is not an area of interest for anti-fraud controls?
(a) journal entries and adjustments made in the end-of-period financial reporting process
(b) related party transactions
(c) auditor credentials
(d) significant management estimates C
32. [LO4] An example of an incentive/pressure for fraudulent financial reporting risk factor is
(a) a threat to the client company's financial stability caused by rapid growth compared to that
of other companies in the same industry.
(b) significant operations located across international borders in jurisdictions where differing
business environments exist.
(c) inadequate job applicant screening processes for employees with access to cash.
(d) ineffective communication of the company's ethical standards by management. A

33. [LO4] An example of an opportunity for misappropriation of assets risk factor is

(a) compensation inconsistent with expectations.
(b) lack of complete and timely reconciliations of assets.
(c) management's practice of committing to creditors to achieve unrealistic forecasts.
(d) known history of violations of laws and regulations. B

34. [LO5] Significant developments within the client that affect audit strategy include:
(a) A change in ownership and/or capital structure has occurred.
(b) Acquisitions or discontinued operations have recently occurred.
(c) The accounting information systems have been modified.
(d) All of the above D

35. [LO5] Significant developments in the client's external environment that affect audit
strategy include:
(a) Industry competition has increased.
(b) Acquisitions or discontinued operations have recently occurred.
(c) A change in ownership and/or capital structure has occurred.
(d) All of the above A

36. [LO5] Going concern issues may arise when:

(a) Acquisitions or discontinued operations have recently occurred.
(b) The accounting information systems have been modified.
(c) The economy has negatively impacted the client company.
(d) Changes in applicable accounting standards affect the client company. C

37. [LO5] When audit clients acquire new, more sophisticated IT systems,
(a) The audit strategy will not be impacted as long as the duties of accounting personnel are
primarily unchanged.
(b) Auditors with advanced IT knowledge may need to be added to the audit team.
(c) The design of internal controls will be considered ineffective until those new controls have
been tested.
(d) The timing of the auditor's procedures for reviewing interim financial statements will be
accelerated. B

38. [LO5] One of the first procedures performed by auditors during on-location audit work is
the
(a) Development of the firm's audit strategy.
(b) Preparation of the audit report.
(c) Design of the audit plan.
(d) Establishment of an understanding of the company's ICFR systems. D
39. [LO5] Auditors may obtain information about a client company during other engagements
conducted for the client such as
(a) audits of a subsidiary or other related party entity.
(b) reviews of quarterly financial statements filed with the SEC.
(c) examinations of information included in a registration statement.
(d) All of the above D

40. [LO6] Which of the following would not be likely to participate in an audit planning
meeting?
(a) The core audit engagement team.
(b) The audit team's tax manager
(c) The audit team's partner for IT
(d) The chair of the client's audit committee. D

41. [LO6] Which of the following items are included in the audit planning meeting?
(a) brainstorming about fraud risks
(b) establishing responsibility for preparing the financial statements
(c) establishing responsibility for monitoring of internal controls
(d) preparing the engagement letter. A

42. [LO6] Which of the following items would an audit engagement partner likely
communicate with the members of his or her audit team during a planning meeting?
(a) Responsibility for notifying appropriate individuals of any significant issues or difficulties
encountered during the audit.
(b) Identification of the type of audit report to be issued.
(c) The need to complete the quarterly review before communicating with any tax
professionals assigned to the audit engagement.
(d) Responsibility for notifying the audit committee and internal auditors of the firm's specific
audit approach. A

43. [LO6] The audit planning meeting must

(a) take place before the client acceptance decision is made.
(b) be attended by the entire core engagement team and the predecessor auditors.
(c) establish an understanding among the members of the audit team about the objectives of
the audit.
(d) prepare the internal auditors for the work they will be asked to perform to supplement the
auditor's procedures. C

44. [LO6] The document that presents all of the issues discussed as part of audit strategy is
the
(a) engagement letter
(b) quarterly financial statements
(c) audit planning memo
(d) risk assessment memo C

45. [LO6] Which of the following items in not typically documented in an audit planning
memo?
(a) audit engagement objectives and deliverables
(b) the auditors' understanding of ICFR and IT systems
(c) planned use of the work of others during the audit
(d) results of the quarterly review process D

46. [LO6] What is the primary resource used on an audit engagement?

(a) the client's IT systems
(b) the auditor's IT systems
(c) human resources of the audit firm
(d) the client's internal auditors C

47. [LO6] To properly instruct and review the work of audit team members, the supervising
auditor must:
(a) keep abreast of accounting and audit issues and manage differences of opinion among
team members regarding audit findings.
(b) obtain instruction from the chair of the audit committee regarding the objectives of the
audit engagement.
(c) communicate with the predecessor auditor regarding differences of opinion regarding prior
year audit findings.
(d) all of the above A

48. [LO6] It is important for auditors to be on-location on the last day of the client's fiscal
year when the client
(a) operates a restaurant that does a considerable amount of business on New Year's Eve.
(b) has significant inventory activities such that the receipts and shipments of inventories at
year-end should be observed.
(c) relies upon electronic verification to indicate the timing of transactions.
(d) refuses to pay overtime rates for the audit team during its busy season. B

49. [LO6] Which of the following is not a valid reason for the performance of audit
procedures at an interim date?
(a) More time is available for management to correct problems identified by interim audit
testing.
(b) The client company does not retain the records that are needed as audit evidence through
the year-end time frame.
(c) Most controls and transactions cannot be audited during busy season.
(d) More time is available for the auditors to concentrate on problem areas, if needed C

50. [LO6] If audit tests are performed at an interim date, supplemental audit evidence:
(a) is not necessary because the same controls are assumed to be in place that resulted in the
balances tested during interim.
(b) is still needed regarding the account balances between the interim testing date and the end
of the fiscal year.
(c) is obtained from the predecessor auditor, when needed to corroborate any changes in the
client's ICFR systems.
(d) is the responsibility of the audit committee, as it would be inefficient for the auditors to
focus on a single audit area during multiple time periods. B

51. [LO6] When audit tests are performed at an interim date, the auditor must
(a) obtain a letter from management to confirm the continued performance of internal controls
and accuracy of the year-end balances.
(b) perform roll forward audit procedures to determine whether a control continued to perform
the same way through year-end.
(c) reconcile account balances tested at an interim date with the year-end balances in the same
accounts.
(d) Both (b) and (c) D

52. [LO7] Which of the following is an example of a specialist who might assist an audit
engagement team on a high-risk audit area?
(a) actuary
(b) banker
(c) internal auditor
(d) tax accountant A

53. [LO7] An IT specialist may be involved in an audit engagement to assist with any of the
following except
(a) inspecting systems documentation.
(b) inquiring of company personnel about how the processes are carried out and how IT
controls are designed.
(c) preparing the IT planning memo.
(d) planning the tests of IT controls. C

54. [LO7] Which of the following is not a relevant consideration in deciding whether an IT
specialist is needed:
(a) the client company's capital structure
(b) the complexity of IT controls and systems
(c) the use of emerging technologies
(d) the use of data by multiple systems or processesA

55. [LO7] Audit firms use time budgets for

(a) indicating the amount of time expected for the various levels of auditors for each audit
area.
(b) tracking and reporting time spent on each audit area.
(c) billing and bidding and future engagements.
(d) All of the above. D

56. [LO7] Time budgets are typically

(a) approved by the audit committee
(b) detailed by areas of the audit
(c) signed by the predecessor auditor
(d) All of the above. B

57. [LO8] Auditors test the operating effectiveness of internal controls only if they
(a) are effectively designed to prevent or detect material misstatements.
(b) address multiple risk factors.
(c) are applied in conjunction with other controls to address a single risk factor.
(d) cause susceptibility to material misstatements. A

58. [LO8] Substantive audit procedures are performed so that the auditor may identify
(a) deficiencies in the design or operating effectiveness of internal controls.
(b) weaknesses in the effectiveness of the client company's audit committee.
(c) material misstatements in the client company's financial statements.
(d) Calculations and controls that mitigate the risk of fraud. C
59. [LO7] Which of the following is not a form of audit evidence?
(a) recalculation
(b) reperformance
(c) repetition
(d) inquiry C

60. [LO7] ICFR tests to provide evidence on whether the controls can be relied upon for the
financial statement audit can be performed
(a) only during year-end because they must be performed at the same time as financial
statement audit procedures.
(b) only during interim because they must be performed at the same time as financial
statement audit procedures.
(c) at any time the evidence is available, as long as the entire period of reliance is evaluated.
(d) at any time after the substantive procedures have been completed, so that the opinion on
financial statement misstatements is not superceded by the opinion on the effectiveness of
controls. C

61. [LO8] Sufficient evidence may be provided without examining all of the transactions in an
account balance is the auditor uses well-designed
(a) sampling approaches
(b) internal control procedures
(c) inspection techniques
(d) assertions related to the fair presentation of account balances. A

62. [LO8] The nature, timing, and extent of audit needed audit tests will depend upon the
answers to each of the following questions except
(a) How could a material misstatement happen?
(b) What internal controls has the client implemented to address potential misstatements?
(c) How might internal controls fail such that a material misstatement occurs?
(d) How many times have material misstatements been undetected? D

63. [LO8] When inquiry, observation, and inspection are all used to trace a transaction as it is
initiated, authorized, processed, and recorded, the process is called a(n)
(a) inspection
(b) walkthrough
(c) assertion
(d) analytical procedure B

64. [LO8] If an audit program calls for the auditor to interview the client about an important
control activity, this is an example of which type of audit procedure?
(a) reperformance
(b) tracing
(c) inspection
(d) inquiry D

65. [App] Which of the following is not a form of evidence obtained through the auditor's
direct personal knowledge?
(a) observation
(b) reperformance
(c) inquiry
(d) inspection C

66. [App] A principal auditor may share responsibility for an audit opinion with
(a) another independent auditor who has performed a significant portion of the audit work.
(b) the client's internal audit staff, if they provide significant assistance to the audit team.
(c) a specialist who provides expert advice on the valuation of inventory.
(d) an attorney who provides expert advice on a pending legal matter. A

67. [App] Which of the following is not an indicator of competence that is relevant to an
auditor's evaluation of other individuals performing a portion of the audit work?
(a) professional certification
(b) professional experience
(c) level of education
(d) access to the board of directors D

68. [App] If internal auditors provide direct assistance to the external audit team, the
independent external auditor must
(a) reperform all of the work provided by the internal auditors.
(b) supervise and evaluate the work performed by the internal auditors.
(c) refuse to issue an audit opinion, due to a lack of independence.
(d) indicate a division of responsibility in the performance of the audit. B